By Theresa Cagle Fry, Senior Vice President and Manager IRAs, Retirement & Education Planning
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Playing jokes and spreading false information on April Fools’ Day is a practice that is recognized worldwide. The origin of playing hoaxes on April 1 is not clear, but it is believed to have been around since the 1500s. Not surprisingly, you may be wary of believing all of what you are told or read today. But this is no April Fools’ prank, most people pay federal income taxes on their Social Security income.
At one time, Social Security benefits were tax free. Today, if your only source of retirement income is Social Security, then your benefits may still be tax free. But the reality is, most retirees pay income taxes on a portion of their Social Security income. The higher your income, the more taxes you’ll pay.
Taxes on Social Security are determined based on your combined or “provisional income.” Provisional income results from adding together your adjusted gross income (AGI), your tax-exempt interest (for example, interest from municipal bonds or U.S. savings bonds) and half of your annual Social Security benefit amount.
With AGI as the base for your combined income, it’s important to understand that AGI includes income from a variety of sources. If you are still working (or your spouse is and you file a joint tax return), wages or self-employment income would be included in your AGI. Other sources of income that can increase your AGI include interest income, dividends and taxable distributions from 401(k)s, IRAs and pensions. However, if you are drawing retirement income from Roth savings accounts (Roth IRAs or designated Roth accounts in your workplace retirement plans), qualified distributions are income tax free and therefore, are not included in your AGI or your provisional income.
The chart below provides a summary of Social Security taxation based on your tax filing status and provisional income. These amounts are not adjusted for inflation, so over time, more and more people will have to pay income taxes on their Social Security benefits.
| Taxable Portion of Your Social Security Benefits | Married, Filing Joint Return with Provisional Income of… | Single with Provisional Income of… |
| 0% | Less than $32,000 | Less than $25,000 |
| Up to 50% | $32,000 – $44,000 | $25,000 – $34,000 |
| Up to 85% | More than $44,000 | More than $34,000 |
Merely landing in one of the two higher income tiers does not mean you will pay income taxes on the highest percentage of your Social Security benefits. The IRS provides this online tool* to help you calculate how much of your Social Security income is taxable. If your benefits are taxable, you can instruct Social Security to withhold taxes from your monthly benefit payments. They offer four choices: 7%, 10%, 12% and 22%. (Note: State taxes on Social Security vary so check with your tax professional if you need help.)
Although you may come across false information on April Fools’ Day, you can rely on these three truths about taxes and Social Security: (1) There is no age at which you stop paying federal income taxes on Social Security; taxation is based solely on provisional income, (2) the federal income taxes collected on benefits go into the Social Security trust fund or “reserves,” which are in turn used to pay future Social Security benefits, and (3) Most people pay federal income taxes on their Social Security benefits.
*https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable
IMPORTANT DISCLOSURES: The information provided is based on internal and external sources that are considered reliable; however, the accuracy of this information is not guaranteed. This piece is intended to provide accurate information regarding the subject matter discussed. It is made available with the understanding that Benjamin F. Edwards is not engaged in rendering legal, accounting or tax preparation services. Specific questions on taxes or legal matters as they relate to your individual situation should be directed to your tax or legal professional.