Benefits from Social Security serve as an essential income stream for numerous retirees across the United States. Nevertheless, these benefits must adhere to federal taxation regulations, and in certain instances, they may be subject to state taxes as well. Fortunately, the majority of states do not impose taxes on Social Security benefits.
Currently, 41 states along with Washington, D.C. do not tax these benefits, allowing retirees residing in these locations to receive their Social Security income free from the burden of additional state taxes. It is still essential to remember that federal tax regulations are applicable to all individuals, irrespective of their state’s tax laws.
The IRS employs a method known as “combined income” to ascertain the taxable amount of a retiree’s Social Security benefits. This combined income encompasses adjusted gross income (AGI) from all non-Social Security sources, nontaxable interest income, in addition to half of the retiree’s Social Security benefits for the current year.
Federal taxation on Social Security
After determining the combined income, the IRS establishes particular thresholds to figure out how much of the benefits are taxable. For instance, a married couple filing jointly with a combined income of $49,000 may have up to 85% of their Social Security benefits subject to taxation. This taxable amount is subsequently added to their other income and subjected to the couple’s normal income tax rate.
It’s vital to recognize that the percentages referenced in these calculations indicate the portion of the benefits that are taxable, not the actual tax rate itself. Many retirees mistakenly assume that their benefits will be taxed at the rate of 85%, which is inaccurate. As individuals plan for their retirement finances, it is important to consider these tax implications carefully.
Even though the majority of states provide tax exemptions for Social Security benefits, federal taxes can considerably impact retirement income. By gaining a better understanding of how these taxes function, retirees can make well-informed choices and steer clear of unexpected bills during tax season.
