Don't Mess With Taxes

Many Social Security recipients are celebrating the announcement that their benefits will increase in 2022. But if you get other income to help you enjoy your retirement, you could owe tax on your government benefits.

There's some good news for the around 72 million people who receive Social Security benefits, either as retirees or Supplemental Security Income (SSI) recipients (or both). The Social Security Administration announced* on Wednesday, Oct. 13, that they will see a 5.9 percent increase in their benefit checks in 2022.

It's the largest increase to the government benefits, which primarily go to retirees, in nearly four decades. Senior citizens getting Social Security should see around $92 a month more next year.

If that seems like a smaller amount that you expected, remember that the actual Social Security benefits that seniors receive will be docked to pay their Medicare Part B premiums. And a recent report by the Center for Retirement Research at Boston College found that the Social Security benefits bump may not keep up with the expected increase in Medicare premiums.

Tax concerns, too: There's also some disconcerting news for senior citizens on the tax front.

Some people rely solely on Social Security income in their golden years. When that's your only source of income, it's not taxable.

But most folks find they need to supplement their government benefits to have a more comfortable retirement. And when you start adding to your bank account I other ways, you'll attract the Internal Revenue Service's attention.

Many older individuals rely on investments, including individual retirement account savings, to enjoy their retirement days. Others take part-time jobs to help make ends meet.

Depending on the amount of other income you get, you could face federal taxes on Social Security benefits. The exact tax amount is based on how much other money you receive in addition to your monthly government payments.

When, and how much, Social Security is taxable: When your total income as a single individual 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.

However, when your total earnings exceed the earnings limit for your filing status, then the IRS expects 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. 

The IRS has an online tool where you can get an idea of how much of your Social Security benefits are taxable. But before you click over there, 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.

Don't forget state tax bites: When you look for the perfect place to spend your retirement years, you might want to consider its tax laws.

The 13 states listed below tax some portion of Social Security:

There's some good news for retired residents of West Virginia. It's fitting that the Mountain State 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 2021 state tax returns filed next year, older filers will be able to exclude 65 percent of their Social Security benefits from taxable West Virginia income. When Jan. 1, 2022, arrives, seniors' Social Security benefits will be tax-free.

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

Social Security tax statements: When it comes to filing taxes, Social Security recipients will need a couple of tax forms.

First, there's Form SSA-1099, Social Security Benefit Statement. The Social Security Administration, or SSA (that explains the form's numeric title), issues this statement, like most earnings reports that affect your tax filing, 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 another form, this one from the IRS, 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, as noted on line 6, fall into that "certain Federal Government" category.

On that same line, 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 Social Security Administration 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, mail the W-4V — the agency still is not offering face-to-face meeting in field offices due to COVID-19 — to your local Social Security office.

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.

Asterisk for the still-working: OK, I know you've been wondering what the heck that red * was for at the top of this post. It's for (shameless plug alert) another post.

Specifically, the Social Security benefits bump announcement discussed here also referred to the annual wage base. This is the amount of earnings that are subject to the payroll tax that goes, from both employees' earnings and matched by their employers, to the federal retirement plan's trust fund.

That amount for 2022 is $147,000.

You can read more about the increase and what it means to those of us still working in my post with the spoiler headline Social Security wage base is $147K in 2022, meaning more payroll taxes for higher earners. 

You also might find these items of interest:

• 7 tax breaks for older taxpayers
• More retirement, and tax, changes ahead under W&M approved SECURE Act 2.0
• Retirement threats: Older Americans' growing debt, taxes on Social Security benefits

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