Is it possible to calculate social security taxes? Is it taxable? Is there a social security income tax calculator available?
The answer to all the above-mentioned questions is YES! Social Security Income tax is very much taxable at the federal level. According to your income level, you need to pay taxes accrued on your Social Security benefits.
If you exclusively rely on the Social Security Income payments then you are pardoned to pay taxes on the benefits you enjoy; but if you have other income resources after the retirement age such as 401(k) or any other part-time job, then you are liable to pay income taxes on the Social Security benefits.
Different states imply different taxation policies on the Social Security Income. It is always advisable to work with a financial advisor to have a better understanding of tax accumulation. The financial advisor will help you gain information regarding the taxation policy as well as will make you understand the different sources of the retirement income, which gets taxed by the federal agency.
Let’s have a quick look at the IRS limits for the year 2021 for both individuals and couple filers.
Is Social Security Income Taxable?
According to the IRS, the Social Security Income is taxable but it varies from person to person. A quick way of determining the amount of taxes to be paid on Social Security Income is to take approximately half of the Social Security benefits and add that amount to all the income earned by other sources, including the interest on the tax-exempt commodities as well. The answer that you get is the combined income.
Combine income is a sum of adjusted gross income, half of the Social Security benefits, and the nontaxable interest.
If the amount of combined income exceeds a certain amount limit which the IRS has termed as the base amount, then you need to make payment under the banner of tax.
The base amount limit is set by the IRS; if you are filing individually or as a head of a household or qualify as a widow or a widower; then the base limit will be $25,000. The limit set by the IRS for the couple filers is $32,000. If a married person applies but lives separately, he will still have to pay taxes on the Social Security Income.
Social Security Income Tax Calculator
The Social Security Income tax calculator determines the amount of the taxes to be paid. The taxable amount will solely depend upon the combined retirement income explained above.
It is to be noted that you don’t have to pay taxes on more than 85% of the Social Security benefits income.
For instance, the Social Security Administration disclosed that if someone files as an individual and one’s total income is mounting to be less than the base amount of $25,000, then one is not liable to pay any taxes on the Social Security benefits for the year 2020.
For the years of 2019 and 2020, the individual filers having a combined income of $25000 to $34000 are liable to pay income taxes which grossly makes up 50% of the social security benefits. But If the combined incomes exceed $34000 then the filer is required to pay a staggering 85% of the social security benefits income.
If 50% of the SSI benefits are subjected to be taxable, then the exact amount that you include in the taxable income (the one which is written on the FORM 1040) must be lesser than or equal to half of the social security benefits accumulated annually or it should be the half of the difference between IRS prescribed base amount and the combined income.
For example; a single filer receives a Social Security benefit of $1543 per month, making the annual benefits total $18,516 then its half will be $9258. For instance, the filer’s combined income is $30,000. The filer needs to calculate the difference between the base amount and the combined income to generate the payable tax. In this case, the base amount is $25000 for single filers. So the taxable amount is $5000, which the filer should enter in the federal income tax form because it is the amount less than half of the annual Social Security Income benefits incurred.
The above example is about the single filer who is supposed to pay taxes of 50% of the social security benefits. Things are slightly trickier when it comes to payment of the taxes which are accrued on 85% of the SSI benefits.
The IRS has generated software to aid the filers in calculating the taxes. The Social Security Income tax calculator is readily available along with a worksheet that helps in calculating the overall tax liability by the filer.
Filing of Social Security Income on Federal Taxes
After calculating the amount for the taxable Social Security Income; it is time to enter that particular amount in the form of income tax provided by the federal government.
First, the filer needs to calculate the total amount of the benefits one incurs annually. This option is available in the 3rd box of the form SSA-1099. Further on the form 1040, the filer needs to write down the total amount of SSI benefits on the 5a option whereas the taxable amount is to be written in front of the 5b line.
It is important to note that if the filer is filing or making amendments in a tax return for a year before 2017 then one is required to file the taxation with form 1040-A or 1040. Form 1040-EZ does not let you report the Social Security income taxation before the year 2017.
A Simplistic Approach to Social Security Taxes
Before the commencement of retirement, when you were working full throttle; the employer most probably withheld payroll taxes on your behalf from your paycheck. The same rules apply here when you are filing for federal income taxes during retirement; i.e. Withhold taxes from the monthly generated income.
To withhold taxes from Social Security benefits, you are required to fill out the FORM W-4V (voluntary withholding request). This is a very small form comprising only seven lines. All you need to do is fill up your personal information and then further choose how much you want to withhold from the SSI benefits. The withholding options readily available are 7%, 10%, 12%, and 22 % from the monthly benefits income.
After filling the form, drop it directly in person to the closest Social Security Administration office or mail it.
There is an option of estimated tax payments available for people who want to pay the exact amount of withholding payments instead of withholding their SSI benefits taxes.
Estimated payments are those tax payments that a person makes every quarter on an income that the employer cannot withhold in the tax form.
Usually, the retirees opt for Social Security Administration to withhold the taxes. The estimated taxes are trickier and they require you to do the work all through the year to make the payments.
The IRS gives the relaxation to the filer to switch between Social Service Administration benefits and estimated payments withholding taxes anytime they desire.
State Taxation Rules and Regulation on Social Security Income Benefits
All the above-mentioned information is regarding federal income taxation. States charge taxes separately and they vary from state to state.
13 states charge taxes on at least one of the Social Security Income sources. Minnesota, Vermont, North Dakota, and West Virginia follow the same rules for taxation as prescribed by the federal government. If a person lives in any of the above-mentioned four states then one is liable to pay the state’s regular income tax rates on the taxable benefits that make up almost 85%.
The rest of the nine states out of the 13; do follow the rules generated by the federal government but they do offer few exemptions or deductions based on income criteria and age set by the particular state exclusively. So it is very likely that a person living in one of these nine states will not be paying the full taxable amount.
The rest of the 37 states including Washington D.C do not tax the Social Security Income benefits.
Every human being wants to pay the least possible tax. It is in human nature to try to get away with the payment of accrued taxes especially when you hit the retirement phase; when the main source of income is not in sight or is phasing out and the majority of the Social Security Income benefits are seen as savings.
It is very wise to have other sources of income readily available as well when you hit the retirement phase; as more income options mean that your financial condition is better than many of your counterparts and that it means that you are not solely dependent upon Social Security Income to earn your bread and butter.
It is advisable to work with a financial advisor to devise a fruitful plan for retirement. These things need to be done beforehand so that the separate options can be determined by getting help from a Social Security Income tax calculator along with other expenses in the life of retirement. A person should be prepared beforehand and must have all the financial solutions readily available against any problem or difficulty monetarily.