Home > Personal Finance > How Will Your Social Security Benefits Be Taxed?

Comments 0 Comments

Social Security is a massive government program with hundreds of billions of dollars running through it. In fact, $863 billion was paid out just in 2014. Whether you’re already receiving Social Security payments, or it’s decades away for you (and contrary to rumors, your Social Security payments will probably still be there for you then), let’s walk through the tax aspects of Social Security under current rules that everyone should know.

Whenever you elect to begin receiving Social Security payments, one of the forms you will fill out is called a W-4V, which directs the federal government to withhold zero or some taxes out of each payment as they are considered income to you. That’s right, even though the fact that you are getting a check at all is the result of decades of taxes on your income, when it comes back to you it’s taxed as income.

With a 401(k), IRA, Roth IRA, personal residence in most cases, and just about any other type of tax structure, you at least get a deduction or freedom from the tax in one direction or the other — when it comes to you or when you deposit the funds. Not so with Social Security, thanks to laws passed initially in 1984, and again in 1993 to increase the taxable amount of the benefits — both specifying that only households of the “higher income” category would have to deal with this tax. However that threshold might be a gray area, as the official Social Security website says “Beneficiaries of modest incomes might still be subject to the 50% rate, or to no taxation at all, depending on their overall taxable income.”

Under current rules, if you file a joint return and your household income is more than $44,000, then up to 85% of your Social Security payments may be considered taxable. It can actually be noticeably more complicated to calculate this, so it’s important to check with your financial planner or tax adviser for general planning purposes. He or she may advise you that if your income will be above this figure, you may want to consider withholding some of the payments. If you are a single filer and receive more than $34,000, up to 85% of your payments may be considered taxable. The formula here would be to take your adjusted gross income, your normally non-taxable interest like municipal bond interest payments, and half of your Social Security income. So that means that households that are living mostly or entirely off of their Social Security checks may not have any tax due.

There’s a little bit of good news: Although you might be paying some tax to the federal government, there are 37 states that do not tax Social Security payments. That leaves only 13 that do in some form — Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont and West Virginia. If you live in one of these states though, don’t start packing your bags just yet. There may be some exemption from other forms of income, like pensions or IRA withdrawals that affects you in a positive way — so again, consider working with a tax adviser. After deductions and exemptions, Colorado rarely taxes a significant portion of payments. Connecticut doesn’t tax it if you file jointly and your income is under $60,000, or under $50,000 for single filers. There are similar exemptions in the other states.

If you have not yet retired, try this exercise. Take the net paycheck you have coming in right now — after all the taxes and retirement contributions and health insurance and so forth are removed — and write it down. Then either calculate, or have your financial or tax adviser calculate, what your household’s net check or checks from Social Security would be combined after these tax scenarios. Unless your budget is taking you backwards each month, that gap you’re looking to cover might be smaller than you think.

More Money-Saving Reads:

Image: iStock

Comments on articles and responses to those comments are not provided or commissioned by a bank advertiser. Responses have not been reviewed, approved or otherwise endorsed by a bank advertiser. It is not a bank advertiser's responsibility to ensure all posts and/or questions are answered.

Please note that our comments are moderated, so it may take a little time before you see them on the page. Thanks for your patience.

Certain credit cards and other financial products mentioned in this and other articles on Credit.com News & Advice may also be offered through Credit.com product pages, and Credit.com will be compensated if our users apply for and ultimately sign up for any of these cards or products. However, this relationship does not result in any preferential editorial treatment.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Our Owners

Credit.com is owned by Progrexion Holdings Inc. which is the owner and administrator of a number of business related to credit and credit repair, including CreditRepair.com, and eFolks. In addition, Progrexion also provides services to Lexington Law Firm as a third party provider. Despite being owned by Progrexion, it is not the role of the Credit.com editorial team to advocate the use of the company’s other services. In articles, reporters may mention credit repair as an option, for example, but we’ll also be sure to note the various alternatives to that service. Furthermore, you may see ads for credit repair services on Credit.com, but the editorial team isn’t responsible for the creation or implementation of those ads, anymore than reporters for the New York Times or Washington Post are responsible for the ads on their sites.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team