As more people are retiring with Social Security benefits there are also more people unsure as to whether they owe taxes on their benefits and are required to file tax returns. The simple answer is that Social Security benefits are taxable, but if you rely exclusively on Social Security, you probably won’t pay taxes on these benefits and, in some instances, may not need to file tax returns.
Retiring with Social Security doesn’t mean you don’t file taxes
Misunderstandings about Social Security, retirement and taxes aren’t uncommon. There are too many variables in the tax laws for the default takeaway to be that you never again need to file a tax return with the IRS.
The rules for taxing social security benefits are found in IRS Publication 915 and the What’s New for 2018 section lists these three items:
- No miscellaneous itemized deductions allowed
- 2018 Form 1040 redesigned
- Form 1040A and Form 1040-EZ no longer available
Publication 915 also contains instructions to determine whether or not your benefits will be taxable, and if so, to what extent.
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Married? Consider your filing status carefully
Your filing status determines the base amount which is part of the formula the IRS uses to determine your taxes.
- If you’re married and filing a joint tax return, your calculations are based on both your incomes and both your Social Security benefits.
- If you’re a married couple and lived in the same household at any time during the tax year and you choose to file separate tax returns, your base amount is reduced to zero, and you’ll pay tax on some portion of your Social Security benefits.
- If you’re a married couple and lived apart throughout the year and file separate tax returns, you calculate the taxable portion of your benefits as though you were single.
Whether you’re married or single, the taxable portion of your Social Security benefits cannot exceed 85% of your total benefits.
Your base amount filing status and your taxable benefits
To find out whether any of your benefits may be taxable, compare the base amount for your filing status with the total of:
- One-half of your benefits (found on your Form SSA-1099), plus
- All your other income, including tax-exempt interest
There are some exclusions when making this comparison. Don’t reduce your other income by any exclusions for:
- Interest from qualified U.S. savings bonds,
- Employer-provided adoption benefits,
- Foreign earned income or foreign housing, or
- Income earned by bona fide residents of American Samoa or Puerto Rico.
Using the above calculations, the amount you come up with is your combined income. Or: Adjusted gross income+nontaxable interest+half of Social Security benefits=combined income. If the total is more than your base amount, part of your benefits may be taxable. The plus side of this is that, as the tax laws stand now, you will not pay taxes on more than 85% of your Social Security income. However, you could pay taxes on other income.
“But I’m retiring with Social Security, not working, and I’m not a business owner!”
If the only income you received during 2018 was your Social Security, your benefits generally aren’t taxable, and you probably won’t need to file a return. If you have any income in addition to your benefits, you may have to file a return even if none of your benefits are taxable. If you think you have money due back, you should also file a return.
If you receive any Form 1099 or 1098, remember that the IRS also gets a copy. Here are some, but not all, instances which might trigger your receipt of a Form 1099-Misc from a person or a business for money you received from them (and they may use as a tax deduction):
- at least $10 in royalties or broker payments instead of dividends or tax-exempt interest;
- At least $600 in:
- prizes and awards
- other income payments
- medical and health care payments
- crop insurance proceeds
- fish or other aquatic life
- fishing boat proceeds
Other retirement benefits the IRS taxes
Besides taxing your Social Security benefits, the IRS also considers withdrawals from any tax-deferred investments you might have. These could include traditional IRAs, 401(k)s, 403(b)s, and similar retirement plans, and tax-deferred annuities, in the year the money is taken. State taxes on these payments can vary, so it’s wise to pay attention to state laws, especially if you consider moving to another state. Income from a Roth account can be extremely beneficial during retirement because taxes were paid on money put into the Roth and is not taxable when withdrawn.
Consider income from all sources
Generally speaking, consider all the money you receive as taxable. Then check each specifically. Tax laws are changing and individual interpretation is complicated. State laws could also make a difference. Nontaxable income won’t be taxed, even if you enter it on your tax return. Failing to include taxable income can be a serious problem.
Below are incomes considered NONTAXABLE by the IRS:
- Inheritances, bequests, and gifts under certain circumstances
- Cash rebates on purchases from a retailer, manufacturer or dealer
- Child support payments
- Alimony payments from divorce decrees finalized after 2018
- Most healthcare benefits
- Welfare payments
- Money that is reimbursed from qualifying adoptions
- Money received from a life insurance policy when someone dies (BUT, if you cash in a life insurance policy, a portion or all of it is likely taxable)
- Money from a qualified scholarship (spend it wisely–money used for room and board or other personal expenses is normally taxable)
Below are incomes considered TAXABLE by the IRS:
Nontaxable income won’t be taxed, even if included, so if you’re unsure as to whether other income is considered taxable, include it to this list:
- Unemployment compensation
- Strike pay
- Rental income
- Alimony (for divorce decrees finalized before 2019)
- Royalty payments
- Stock options, dividends, and interest
- Self-employment income
Below are miscellaneous incomes which must be INCLUDED on your returns:
These incomes may be more difficult to identify as taxable but usually must be included on your returns. Any untaxable income, if included on your returns, will not be taxed.
- Employer contributions to an unqualified retirement plan
- Disability retirement payments, sickness and injury payments (income) from an employer-paid plan
- Money and income from offshore accounts
- The remaining amount of a debt or loan that is canceled or forgiven
- The fair market value of property received for your services
Below are incomes from perks and fringe benefits considered TAXABLE by the IRS:
If you or your spouse, and possibly dependents receive any of these for services you render, they are generally considered taxable. You will probably receive some Form 1099. Remember, if you receive any Form 1099, the IRS receives a copy also.
- Company vehicle for personal use
- Company-paid off-site gym membership
- Holiday gifts in the form of cash or gift certificates from your employer
- A portion of employer-paid dependent care
- Company-paid tuition fees over a certain amount
- Company-paid financial counseling fees
- Employer-paid group life insurance over a certain amount
The big ‘takeaway’ here
Generally, sources provide you, as well as the IRS, with appropriate reporting documentation, that being some form of the IRS 1099. If you receive it, so does the IRS. The IRS may not put 2 plus 2 together for a few years, but when they do, they go after you and retroactively penalize you from day one.
Retiring is serious business, and whether or not you agree, the IRS probably has more to say and with a louder voice. When you retire, you don’t get a PASS from the IRS, and you can’t arbitrarily drop out of the taxpaying community.
Remember, too, that many retirees today find that part-time jobs aren’t an option. Most every employer, from grocer to church to non-profit organizations, follows legal reporting, tax, and accounting laws and procedures. Your name and Social Security number will show up somewhere, sometime, and the IRS will get a copy.
What’s the bottom line?
Whether you working on your future retirement tax planning or are facing your first retirement year tax return, every person should have a proactive, planned tax strategy. Don’t rely on things you’ve heard about filing and paying taxes once you’ve retired, and don’t wait for the IRS to come looking for you.
You can have the same opportunities as my clients have to control your own tax future. I can become your CPA tax specialist and financial business and life goals adviser and you can have the control you need and want.
Our goal is to become part of your overall life and business goal planning team so that you’ll be able to establish your own goals and know that you have a trusted professional on your team. We establish and maintain a personal and business relationship with our clients. Your LIFE is your business and your BUSINESS is your life. We’re here for YOU.
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