Is Social Security Taxed Like Other Forms of Income?


Quick Answer

Whether or not Social Security is taxed like income depends on the individual and the specific circumstances. In general, those who rely solely on Social Security income do not have to pay taxes on it.

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Full Answer

Even if someone is not of retirement age, Social Security taxes are taken out of every paycheck. When a person retires and receives Social Security income, he or she may have to pay taxes if he or she receives additional income besides Social Security benefits. This additional income could be in the form of a job, 401(k) account or pension. Those who rely solely on Social Security income do not have to pay taxes on it. It used to be that Social Security income was not taxed. That is no longer the case. Even though everyone receives 15 percent of Social Security income tax-free, up to 85 percent of this income is subject to taxes for some people.

Why Knowing Combined Income is Important
When deciding whether an individual needs to pay Social Security taxes, the government looks at his combined income. Combined income is calculated by looking at the total of an individual's nontaxable interest, adjusted gross income and the Social Security benefits. If someone's adjusted gross income is $20,000, and he or she has a nontaxable interest of $10,000 with Social Security benefits of $12,000, his or her combined income amount is $42,000.

Federal Tax Rate on Combined Income
The tax rate on the combined income is determined by knowing a person's filing status. Since only 85 percent of Social Security income could be taxable only $10,200 of Social Security income will be taxed from the above example. The tax filer's status could be single, married or head of household. These different status types determine how much a tax rate will be applied to the individual's Social Security income. Individuals can choose to pay estimated tax payments quarterly if they anticipate being levied with Social Security taxes.

State Tax on Social Security Income
Depending on where an individual lives, he or she may have to pay state taxes on Social Security income. Several states commonly charge taxes on Social Security income. Individuals who live in one of those states should check to see what their state's tax rate is. Some states use the same formula as the IRS to determine the tax rate while others use their own formulas.

How Planning Ahead Affects Social Security Income Taxes
If someone's Social Security income is taxed, this is not necessarily a bad thing. It means that he or she has additional income sources besides Social Security and is not relying solely on this benefit. However, planning ahead helps alleviate some of the taxation on Social Security income. If an individual is years away from retirement, he or she can choose a financial product, such as a Roth IRA instead of the usual IRA, to save toward retirement. Roth IRA income, does not add to combined income. As there are different Roth IRA products, individuals planning to save for retirement need to check the individual products to find the ones that are best for them.

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