Don't Mess With Taxes

A quick Social Security note about for folks not yet at or near the benefits age about taxes on that pre-retirement income. More of it, known as the wage base, will be subject to the Social Security payroll tax. Details are in this post.

Retirees checking on their investments. The income could make their Social Security benefits taxable.

Today's a good day for millions of Social Security recipients. The Social Security Administration (SSA) has announced that benefits will increase a bit next year.

Older folks who get regular monthly Social Security payments, along with those who receive Supplemental Security Income (SSI) benefits, will see their checks go up by 1.3 percent.

Yes, that's not much. But, since I'm trying to look on the bright side, especially as we still cope with the coronavirus pandemic, it's something.

The benefit bumps for around 70 million Social Security and SSI recipients is thanks to a rise in the cost-of-living as measured by the Department of Labor's Consumer Price Index (CPI-W).

The SSA will mail cost-of-living adjustment (COLA) notices to those who get retirement, survivors or disability benefits, as well as representative payees, in December.

But if you don't want to wait, check out this preview example from the SSA of the increase:

When Social Security is taxable: If your main source of retirement money is from your Social Security benefits, your benefits likely will escape the Internal Revenue Service's attention.

But a lot of folks find they cannot live on Social Security alone. They've saved and invested to provide income for their golden years. Many also take part-time jobs to help make ends meet in retirement.

If you do get income in addition to Uncle Sam's retirement benefits, then you'll likely owe tax on at least part of your Social Security. The amount is based on how much other money you receive in addition to your government amounts.

When your total income as a single individual your total income is less than $25,000 or doesn't come to more than $32,000 for a married couple filing jointly, then your Social Security benefits are not taxed.

This earnings cap applies not only to monthly payouts for retirees, but also to spousal, survivor and disability benefits.

When your total earnings exceed the $25,000 as a single filer or $32,000 for married filing jointly couples, then the IRS gets a cut. Exactly how big a bite again is based on your non-Social Security money.

You'll be taxed on up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.

As much as 85 percent of your Social Security benefits could be taxed if your individual income is more than $34,000 or you and your spouse get more than $44,000.

When it comes to determining how much of your Social Security is taxable, the IRS says income includes your adjusted gross income plus nontaxable interest income plus half of your Social Security benefits. 

Here's an example from AARP of how Social Security taxation works:

You file individually, have $50,000 in income and get $1,500 a month from Social Security. You would pay taxes on 85 percent of your $18,000 in annual benefits, or $15,300.

The good, sort of, news is that nobody pays federal taxes on more than 85 percent of their Social Security benefits, no matter their income.

Social Security earnings report: Since it's Tax Form Tuesday, a look at a couple of tax documents in connection with Social Security taxation is appropriate.

Let's start with Form SSA-1099, Social Security Benefit Statement. This is issued, like most earnings reports that affect your tax filing, by the SSA each January.

The key info on SSA-1099 is in box 5, highlighted in the above sample form. That's the amount of benefits you received the previous year.

As mentioned earlier, you'll take half that official amount and add it to any other applicable income to see where you stand vis-à-vis the earnings level that determines how much, if any, of your Social Security is subject to federal tax.

Withhold from your retirement money: If you know you'll exceed the income thresholds, you can get a head start by using today's second Tax Form Tuesday document, the W-4V.

This is a cousin to the W-4 form you gave your employer before you retired to adjust your paycheck withholding. The difference here is the appended V. It stands for voluntary, as it notes in its name "Voluntary Withholding Request."

Use W-4V, as the form also says, to ask that income tax be withheld from "unemployment compensation and certain Federal Government and other payments." Your Social Security benefits fall into that "certain Federal Government" category.

The W-4V gives you the option to have 7, 10, 12 or 22 percent of your monthly Social Security benefit amount withheld for federal taxes. Only these percentages can be withheld. Flat dollar amounts, which are allowed on the workers' W-4, are not accepted on the W-4V.

I know it's difficult to think about giving Uncle Sam back of your benefits that you waited so long to collect, but Social Security withholding could be a preferable alternative to calculating quarterly estimated tax payments.

You can have the SSA withhold taxes when you first apply for benefits. Or if you discover later that you owe some tax on your benefits, you can send the SSA a W-4V form.

You can download the form at IRS.gov or call the tax agency toll-free (1-800-829-3676) and ask it to mail you a Form W-4V. If you are deaf or hard of hearing, call the IRS TTY number 1-800-829-4059.

Once you complete and sign it, deliver the W-4V to your local Social Security office , either in person or by mail.

You also can find more information about retirement and tax withholding in IRS Publication 554, Tax Guide for Seniors and in Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Where you live matters, too: Finally, don't forget about your state taxes. If you live in one of 13 states, those jurisdictions also could collect from your federal government retirement benefits.

The amount varies, but the following tax some portion of Social Security:

There is some good news for residents of the Mountain State. West Virginia is hanging out there on its own in the above list not just because it's the last alphabetically, but also because it is phasing out its Social Security taxation.

For 2020 state tax returns filed next year, West Virginia taxpayers will be able to exclude 35 percent of their Social Security benefits from their taxable state income. The exclusion goes to 65 percent for tax year 2021. And on Jan. 1, 2022, seniors' Social Security benefits will be tax-free.

Contact your tax professional or state tax office for more on how it treats your Social Security benefits.

You also might find these items of interest:

• 7 tax breaks for older taxpayers
• No RMD due April 1 (no fooling) or any time in 2020 
• How you can tap your retirement plan to cover COVID costs

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