Do You Need to Pay Taxes if You Are Only Collecting Social Security?

Q. My husband and I plan to retire when we turn 70 and hope to live the “American dream.” We have saved our whole life to be able to enjoy our summers up north and our winters in Florida. After decades of having Social Security payroll taxes withheld from our paychecks, we feel like we’ve earned our future benefits, and want to keep every dollar we get from the program. If we only collect Social Security when we retire, will we still have to pay federal income taxes?

A. As you described, it’s the great American dream to reach retirement age and to be able to enjoy life and live comfortably. After working all your life and finally reaching retirement age, you may hope to be able to lounge happily on a beach somewhere sipping fancy drinks with umbrellas and enjoying time with friends and loved ones. Ideally, you’ll have plenty of money in the bank and at tax time, you’ll just continue to relax while those younger than you rush to meet the April 15 deadline. Unfortunately, though, reaching retirement age doesn’t automatically relieve you of paying income taxes, even if you are just collecting Social Security and no pension.

Social Security Can Be Treated as Taxable Income

Many new Social Security beneficiaries are surprised to learn that under certain circumstances, a portion of the money they receive from the retirement program can be treated as taxable income, which means they’ll have to pay income taxes on it each year. This is especially common among those who continue working while receiving retirement benefits, as their earned income can take them above the income threshold at which the IRS starts taxing Social Security benefits.

Even those who have retired for good can lose some of their benefits to taxation, regardless of whether they’ve reached full retirement age or not. Currently, almost 20 million people have to pay income taxes every year on a percentage of their Social Security retirement or disability benefits, and that number could rise steadily if the current laws governing benefit taxation go unchanged.

Below, we’ll go over how much income you can earn before your Social Security benefits become partially taxable, and strategies you can use to minimize or eliminate the tax burden that can come with receiving Social Security payments

Maximum Earned Income for Seniors

If your total income from all sources (including social security benefits) is more than $25,000 for an individual or $32,000 for a married couple filing jointly, you must pay income taxes on all of your income. Below those thresholds, you don’t have to pay income taxes.

The portion of your income subject to taxation varies with income level. You’ll be taxed on:

• up to 50% of your income if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.

• up to 85% of your income if your income is more than $34,000 (individual) or $44,000 (couple).

Say you file individually, have $50,000 in income, and get $1,500 a month from Social Security. You would pay taxes on 85% of your $18,000 in annual Social Security benefits. Nobody pays taxes on more than 85% of their Social Security benefits, no matter their income.

There are some other factors that could push you over the line. Besides having Social Security and other pension benefits counted as income, interest and dividends from investments and withdrawals from retirement accounts (such as an IRA) will also push your income up.

All of the above concerns federal taxes. Thirteen states also tax Social Security to varying degrees.

Keep in mind

• If your child receives Social Security dependent or survivor benefits, those payments do not count toward your taxable income. That money is taxable if the child has sufficient income (from Social Security and other sources) to have to file a return in his or her own name.

• Supplemental Security Income (SSI) is never taxable.

• If you do have to pay taxes on your benefits, you have a choice as to how: you can file quarterly estimated tax returns with the IRS or ask Social Security to withhold federal taxes from your benefit payment.

Retirement Savings Taxability

According to the Social Security Administration, 40% of retirees pay federal income tax on at least some of their benefit. The average Social Security payout is only $1,411, which is $16,932 per year. Seniors who can’t live on $16,932 per year often find they must take part-time work or rely on other retirement savings plans to pay their living costs.

Reduce Your Income Tax Liability

If you’re concerned about paying income taxes on your Social Security, there are some things you can do to prepare for retirement, and possibly reduce taxes.

• Cut back expenses: If you haven’t done so already, look at areas of your budget where you can cut back on your monthly spending.

• Wait to claim benefits until after you’ve quit working: Many people claim Social Security benefits at the earliest possible time, even if they’re still earning a paycheck. If you’re working, you’re more likely to be in a higher tax bracket than you’ll be in after you retire.

Of course, the best strategy depends on your individual circumstances. Call us to set up an appointment to discuss your retirement, social security, and financial future today.

If Social Security is the Majority of Your Income, Planning Should Be at the Forefront of Your Mind!

What if you are depending mostly on Social Security for retirement and you or a loved one becomes incapacitated or needs long-term care? Every adult over the age of 65 or retired needs to have a legal and financial retirement plan in place. If you haven’t already done this, please call the Farr Law Firm for retirement planning, incapacity planning, and long-term care planning as soon as possible — if you haven’t been to see us before, you’re entitled to an initial no-cost consultation to address your retirement planning needs:

Fairfax Retirement Planning: 703-691-1888

Fredericksburg Retirement Planning: 540-479-1435

Rockville Retirement Planning: 301-519-8041

DC Retirement Planning: 202-587-2797