Like many of the topics we go over regarding taxes, the taxation of Social Security income can get complicated. For many retirees, they start Social Security without even thinking about how it is going to affect their taxes until the following year. I meet with new clients all the time that can’t figure out why they owe a bigger bill at the end of the year.
Here are the 4 things you may not know about Social Security income and how it’s taxed.
- Yes, the Federal Government charges income tax on your Social Security income. The question is how much? If your Modified Adjusted Gross Income (MAGI) – which is income (before deductions and excluding Social Security income), add in any tax free interest (I know…) and then add 50% of your Social Security benefits. If this amount is under $25,000 you don’t pay any income tax on Social Security. If it’s in between $25,000 and $34,000 – up to 50% of your benefit will be subject to tax. If it’s above $34,000 – up to 85% of your benefits may be considered taxable income. Phew! What a mouthful.
- In many states (California included), Social Security isn’t considered taxable income. We don’t talk about it too much, because we feel like the States might realize something is up and change their laws quicker than you can write your congressman.
- Medicare Part B premiums may be deductible. This is included with other qualified medical and dental expenses – anything above 7.5% of your Adjusted Gross Income can be considered an itemized deduction.
- You can set up Federal withholdings from Social Security if needed. The form is available in the link below. Fill it out and elect either 7% / 10% / 12% / 22%. If you’ve owed a tax bill at the end of the year and haven’t set up an automatic withholding, I would suggest you consider starting this to ease your budget come April 15th each year moving forward.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.