For many retired people, the Social Security Cheque is the money that allows you to pay the rent, buy food or cover the medicines of the month. So, when the tax season arrives, one question can generate concern: Can the government also collect taxes on that money?
The answer depends on how much the person receives and, above all, what other income he has during the year. The Internal Tax Service (IRS) states that a portion of Social Security benefits may be subject to federal income tax.
This applies to retirement, disability and survivor benefits.It should not be confused with the Supplementary Income Insurance (SSI) program, whose payments are not subject to federal income tax.
The IRS uses an amount known as combined income to determine whether some of the profits are taxable. The calculation may seem complicated, but in simple terms three elements are taken: adjusted gross income (AGI), tax-exempt interest and half of the annual Social Security benefits.
For example, a retired person who receives Social Security and also gets money from a pension, works a few hours or withdraws funds from a retirement account, should consider those incomes when making the calculation. Revenue from investments can also influence.
If you are single and your combined income is less than $25,000, your benefits are generally not subject to federal tax. For a married couple who submit a joint statement, the limit is $32,000.
When the combined income exceeds those levels, you can start taxing a portion of the profits. For single taxpayers with combined income between $25,000 and $34,000 dollars, up to 50% of the profits can be taxable. In couples presenting together, the corresponding range ranges from $32,000 to $44,000 dollars.
If the combined income exceeds $34,000 for a single person or $44,000 for a couple presenting together, up to 85% of the profits can be subject to federal tax.
It is important to understand one detail: that 50% or 85% is not the tax rate; it represents the maximum proportion of the profits that can be included as taxable income.
Imagine a retired person who receives their Social Security every month, but also gets money from a pension and has some interest on their savings. Even if your Social Security check hasn’t changed, those additional incomes can make some of your earnings subject to tax.
Something similar happens in a couple. When submitting a joint statement, both’s income is taken into account to determine whether part of the Social Security is taxable, even if only one of the two receives benefits.
Every January, the Social Security Administration (SSA) sends the SSA-1099 form, known as Social Security Benefits Declaration. The document shows how much the beneficiary received during the previous year and serves as a reference for preparing the tax return.
If a person expects to have to pay taxes, they can request that a part of their profits be retained using the W-4V form. There is also the possibility to make quarterly taxes estimates.
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