Do you know how much money you need in retirement to maintain the lifestyle that you currently live? Are you on track with your savings to make sure you can still live comfortably? If you have your retirement budget planned down to the tee, one thing you do not want to forget is taxes.
Most people anticipate being on a fixed income when they retire. What they do not anticipate is paying taxes on the majority of their retirement income. There is a myth circulating that social security benefits are not taxable. I'm here to burst the bubble...social security income is taxable income. When combined with other streams of income it can leave you with a tax bill that you did not budget for in retirement.
What is social security?
Social security is a government program that provides benefits to retired people. Unemployed and disabled individuals may also be eligible to receive social security benefits. We'll be focusing on retirees in this article.
Social security is part of the retirement income equation for almost every American. It provides income for qualified retirees and their families in place of wages.
When you work you pay social security tax. Self-employed individuals also pay toward this through self-employment tax. These taxes go credits toward your social security benefits. The number of credits you need to be eligible for retirement benefits depends on your date of birth. If you were born after 1929 you need 40 credits. According to the Social Security Administration that is about 10 years of work.
You can check your benefits at www.ssa.gov/myaccount. You can create a my Social Security Account to help you plan for retirement.
How much of social security is taxable?
The amount of social security that is taxable depends on your provisional income. Provisional income is a tool used by the IRS to determine how much if any of the benefits are taxable. The IRS uses your modified adjusted gross income and half of your social security benefits to create this threshold. If your provisional income exceeds the base amounts set by the IRS you could pay taxes on your benefits.
Your social security benefits can go from not taxable to the IRS taxing 50 - 85 % of them. The 2022 provisional income amounts based on tax filing status are in the table below.
2022 Filing Status | Base Income |
Single, Head of household, Qualifying widow(er), or Married filing separately and lived apart entire year. | $25,000 |
Married filing jointly | $32,000 |
Married filing separately and lived together. | $0 |
The table below shows how to determine how much of a married couple's benefits the IRS taxes when they file together.
Provisional income for married taxpayers | Taxable social security benefits |
Less than $32,000 | $0 |
$32,000 - $44,000 | Smallest of 50% of benefits and 50% of provisional income above $32,000. |
More than $44,000 | Smallest of 85% of benefits and 85% of provisional income above $44,000 + $6,000. |
Everyone is not married when they retire. If they are they may not live and file with their spouse. The table below shows how to determine the taxable benefits if you're filing status is not MFJ
Provisional income taxpayers not married | Taxable social security benefits |
Less than $25,000 | $0 |
$25,000 - $34,000 | Smallest of 50% of benefits and 50% of provisional income above $25,000. |
More than $34,000 | Smallest of 85% of benefits and 85% of provisional income above $34,000 + $4,500. |
What states do not tax social security benefits?
Social security may be taxable at the Federal level but that doesn't mean all states tax it. There are some states that do not tax it all and others only tax it if you have over a certain level of income. Similar to what the IRS does.
For example, if you are in the state of Kentucky the first $31,110 of retirement income is not taxable. So if your social security benefits are under that they are not taxed.
38 out of the 50 states do not tax or have special tax treatment for social security benefits. Those states are:
Alabama
Alaska
Arizona
Arkansas
California
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kentucky
Louisiana
Maine
Maryland
Massachusetts
Michigan
Mississippi
Nevada
New Hampshire
New Jersey
New York
North Carolina
Ohio
Oklahoma
Oregon
Pennsylvania
South Carolina
South Dakota
Tennessee
Texas
Virginia
Washington
Wisconsin
Wyoming
States reserve the right to change their tax laws. Check with your state department of revenue to see how they treat social security benefits to make sure they haven't made any changes.
What happens if you don't live in a state that doesn't tax social security benefits? Maybe you didn't know to plan for the IRS to tax your social security. Well, it's not too late. Even if you have a tax bill that you cannot pay today.
If you owe the IRS $10,000 or less and can pay it off in 36 months I highly recommend my e-book Guaranteed Payment Plan. In the book, I walk you through how to set up your payment plan online or by phone. You can make sure it does not happen again by making estimated payments to cover the bill for next year.
If you'd like more guidance in planning for your retirement and taxes be sure to check out my podcast, Tax Relief with Timalyn Bowens. Episode 13 releases on Friday, September 13th and I'm covering Retirement Income and Taxes. You won't want to miss it.
Be sure to grab a pen, and paper, and share the episode with a friend. Because back taxes shouldn't ruin your life!
Timalyn S. Bowens EA is America's Favorite EA and Tax Expert who will work hard to find a customized legal solution for you! As an Enrolled Agent licensed through the Internal Revenue Service Timalyn is able to fight the IRS for taxpayers in all 50 states. As the host of Tax Relief with Timalyn Bowens and a YouTube content creator she empowers taxpayers to make educated decisions about their tax situation.
When you are facing questions regarding your personal or business taxes, working with a professional makes all the difference. At Bowens Tax Solutions, we serve our Louisville-area neighbors by providing the tax services and knowledge needed to succeed. We are here to assist you with your tax issues and preventative care. Visit our website at www.bowenstaxsolutions.com for more information..