Taxation of SS Benefits
Social Security benefits are not all taxable. The first taxation of Social Security benefits began with 1983 legislation, and Congress added another level of taxes in 1993. If your only income is Social Security, the Internal Revenue Service does not collect taxes on that income. Your combined income must exceed $25,000 for taxation to apply to Social Security benefits.
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Combined Income
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The Internal Revenue Service bases Social Security taxation calculations on combined income. Combined income is not just adjusted gross income, but nontaxable interest and 50 percent of your Social Security benefits added to adjusted gross income. The total is combined income for calculating taxes on Social Security.
Fifty Percent Taxable
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If your combined income is more than $25,000 as an individual tax filer or $32,000 as a couple filing a joint tax return, the IRS taxes 50 percent of your Social Security benefits. Originally, Congress approved the 50 percent figure because this is the portion of benefits contributed by your employer on which you have not paid taxes previously.
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Eighty-Five Percent Taxed
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A combined income of more than $34,000 as an individual or $44,000 as a couple filing jointly determines a higher rate for taxing your Social Security benefits. High-income earners above these limits have 85 percent of their Social Security benefits taxed. Review Publication 915 from the IRS for Social Security benefits taxation and tips (see Resources).
Controlling Taxes
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It is possible that you can calculate your combined income periodically and keep the total under the limits for the year, especially if you are self-employed or an independent contractor. As an individual, you want to keep your combined income under $25,000 or $34,000; as a couple, you are striving for a combined income below $32,000 or $44,000. When your income falls just above these thresholds, you pay the higher income tax.
Withholding
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You may choose to have taxes withheld from your Social Security benefits check so that you owe less at tax time. Use Form W-4V (see Resources) for voluntary withholding. You choose the percentage you want withheld from choices of 7 percent, 10 percent, 15 percent or 25 percent of the benefit amount. Complete the form, and drop it off or mail it to your local Social Security office. Have this form in place before you receive a lump-sum payment from Social Security. You can file another Form W-4V to stop voluntary withholding if you find it unnecessary.
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