The IRS and Social Security Benefits

Social Security retirement provides seniors with income after a lifetime of earning. Employees and employers pay into the Social Security system during employment years in anticipation of the employee collecting money from the Social Security system on retirement. Seniors are often surprised to find that their Social Security benefits are taxable by the Internal Revenue Service.

History

The year 1983 was one of change for Social Security. The National Commission on Social Security Reform, led by Alan Greenspan, made recommendations accepted by Congress. Recommendations included partial taxation of Social Security benefits for "higher earning" retirees. Taxation changed in 1993 to include an increase in taxes for the highest-earning recipients. According to Social Security Online, about one-third of Social Security recipients pay taxes on their benefits.

Time Frame

For seniors taking retirement as early as age 62 and before full retirement age (66 or 67 in 2010), Social Security benefits are about 25 percent less than those who wait. Many early retirees continue to work. Social Security charges a penalty to those who make more than $14,160 a year in "combined income." Combined income is gross income plus one-half of Social Security benefits and all nontaxable interest. Additionally, the IRS may tax Social Security benefits for single seniors with a combined income of $25,000 or more and married seniors with a combined income of $32,000 or more. Once a senior reaches full retirement age, he can earn any amount without taxation by the IRS.

Effects

The IRS taxes benefits of early retirees who have other income. The combined income calculation of gross income plus one-half of Social Security benefits plus nontaxable interest forms the basis for the tax. Taxation of 50 percent of Social Security benefits applies to individuals whose combined income is $25,000 to $34,000 and to joint filers with $32,000 to $44,000 in combined income. Taxation of 85 percent of benefits applies to individuals with a combined income in excess of $34,000 and to joint filers with an income over $44,000.

Warning

A married person filing an individual return will not escape the taxation of early Social Security retirement benefits by the IRS. Social Security Online states, "If you are married and file a separate return, you probably will pay taxes on your benefits."

Considerations

If your taxes are significant, you may have taxes withheld from your Social Security retirement check by filing for a voluntary withholding. This is form W-4V. You may select the amount withheld. Choices are 7 percent, 10 percent, 15 percent or 25 percent. Once you complete this form, take it to the nearest Social Security office.

References

• Social Security Online: Date Social Security Benefits First Became Subjected to Income Tax
• Social Security Online: Publication 05-10035 - Retirement Benefits
• Social Security Online: Withholding Federal Taxes from My Social Security Check
• Social Security Online: Publication 05-10069 - How Work Affects Your Benefits
• Internal Revenue Service: Publication 915: Are Any of Your Benefits Taxable?

Resources

• Social Security Online: Requesting to Have Income Tax Withheld From My Benefit