The IRS might tax up to 85% of your Social Security benefits. But only if your total income exceeds certain criteria. This rule impacts millions of Americans who receive Social Security payments while also earning supplemental income from pensions, jobs, or investments. If you are not clever, all of your hard work will not be as profitable as you expected once the IRS bites!
How does the IRS figure out how much of your benefits are taxable? Very simple: use a formula based on your modified adjusted gross income (MAGI). Benefits may be taxed for single filers whose income exceeds $25,000, whereas the threshold for married couples filing jointly is $32,000. If your income exceeds $34,000 (individual) or $44,000 (joint), up to 85% of your benefits may be considered taxable income.
While Social Security benefits provide a lifeline for millions across the country, they are not always tax-free. Depending on how much money you make throughout the year from other sources such as jobs, savings, or investments, the IRS may take a portion of your benefits. That’s why it’s important to understand what triggers your benefits into the taxable zone—no one loves finding out they owe more when they believed they were in the clear.
When will Uncle Sam come for your Social Security?
Not every Social Security check is taxed, but if your income reaches a specific threshold, the IRS may want a piece of the pie. It primarily relies on how much extra revenue you bring in over the year. The IRS determines this using a metric known as your modified adjusted gross income, or MAGI. Consider it the IRS’s technique of determining if your total earnings are sufficient to justify a visit from the taxman.
If you fly solo and your total income, including Social Security and other earnings, is less than $25,000, the IRS will not touch your benefits. Couples filing jointly have a little more wiggle room: keep your income under $32,000 and your checks will remain tax-free.
But if your income exceeds those limits, the IRS may step in and tax up to 85% of your Social Security benefits—yes, that much. So, if you haven’t filed your return yet, double-check your numbers before sending anything in. A little planning ahead of time can keep the tax fairy from surprising you later.
How to Keep the IRS Off Your Back
To avoid issues with the IRS after your Social Security benefits begin, keep track of any additional money that comes in. Taking on a side job, collecting interest, or cashing in profits may increase your income enough to trigger taxes on your benefits. So, before your mailbox filled with surprises from the IRS, here are a few wise actions to keep things running smoothly:
- Talk to a pro: If you’re unsure how your income will affect your Social Security taxes, it’s time to bring in the heavy guns—like a tax attorney. A little experienced counsel goes a long way.
- Adjust your withholdings: You can ask Social Security to deduct taxes from your benefits before they reach your bank account. It’s like removing the Band-Aid early so you don’t get stuck with a large bill later.
- Keep track of your taxes: Don’t set it and forget it. Examine your annual returns to see whether it is time to change your strategy. Your future self will appreciate you.
Staying on top of things from the time your retirement checks start arriving will help you avoid unpleasant surprises. After all, the only thing worse than receiving an IRS letter when your budget is already stretched thin.
