You would think that when you finally retire and start collecting Social Security that you no longer have to pay income tax. But this isn't always true. Watch this video to find out more about income taxes for those on Social Security.
Hello, I'm Jill from TurboTax with some information for taxpayers who receive Social Security income.
You would think that when you finally retire and start collecting Social Security that you no longer have to pay income tax. But this isn't always true. In some cases, you may have to report some of your Social Security income on a tax return.
When Social Security is the only type of income you receive during the year, you will never have to pay income tax on it. But remember, if you file a joint return, this must also be true for your spouse as well.
It's when you earn other types of income in addition to Social Security that you will need to determine whether any of it is taxable.
There is a simple calculation you can use to initially determine if you will be paying tax on your Social Security income.
First, you add together 50 percent of your annual Social Security payments with all other income you earn. For purposes of this estimate, your other income also includes earnings that are tax-exempt or eligible for an exclusion from income tax.
This can be a little confusing, so let's take a simple example.
Suppose you receive $20,000 of Social Security, earn $10,000 from a part-time job and receive $2,000 of tax-exempt interest from the municipal bonds you invest in. Fifty percent of your Social Security is $10,000, and the total of your other income, not just taxable income, is equal to $12,000 for a total of $22,000.
Now all you need to do is compare this $22,000 to the "base amount" for your filing status. The base amount can change each year, but the IRS uses it to determine whether your Social Security is taxable. When your total, which in this case is $22,000, exceeds your base amount, you may have to report some of your Social Security income on a tax return.
But this only tells you whether or not it's necessary to calculate income tax on some of your Social Security. For most taxpayers, no more than half of their Social Security payments are taxable. However, some married taxpayers who file separate tax returns may have to pay tax on up to 85 percent of their Social Security income.
Remember, when you use TurboTax to file your tax return, we'll ask you simple questions and determine how much, if any, of your Social Security income is taxable.