Many who have begun receiving benefits from Social Security are surprised at tax time to find that they may have to pay tax on some of those benefits if they have enough other income.
Now, if the only income you receive is Social Security benefits, then you have nothing to worry about. In fact, you probably are not even required to file a return.
Watch out, though, if you have worked hard all your life, have saved money and have made prudent investments which now generate income, or if you decide to continue working. I say that because, as you know, according to the government and to those who are constantly holding their hands out, anybody receiving income beyond Social Security must be rich and thus must be taxed; and they must be taxed on benefits they have already been taxed on before. Some may call this a tax on success, for it is a sin to be successful and they must punish you.
I had to offer that opinion. Now let’s talk about what you need to know about it.
The tax on Social Security benefits only affects those recipients with certain levels of income – that is, taxpayers whose total adjusted gross income, plus tax-exempt income, plus half of their Social Security benefits, exceeds a base amount. In addition, the amount of benefits subject to federal income tax increases for retirees with even higher income – income that exceeds an “adjusted base amount.”
The base amount for a single person is $25,000. For married persons filing a joint return, it is $32,000. If the amount of income exceeds the adjusted base amount, the amount of benefits subject to federal income tax is either:
(1) Half of the overall benefits, or
(2) Half of the excess of the combined income (adjusted gross income plus tax-exempt income plus half of benefits) over the base amount, whichever is less.
Did you follow all that? I didn’t think so. The calculation is a little involved. If you want to know more, see the Social Security Benefits Worksheet in the instructions to IRS Form 1040, which can be accessed at www.irs.gov.
In any case, no more than 85 percent of the Social Security benefits can be subject to federal income tax. Also, the base amounts are not indexed to inflation and can only be changed by Congress.
Fortunately, North Carolina, like most states in the union, does not tax Social Security benefits.
If an individual does have to pay taxes on Social Security benefits, he or she can make quarterly estimated tax payments to the IRS or choose to have taxes withheld from the benefits.
You might be interested to know that the tax on Social Security Benefits began in 1984. Apparently the National Commission on Social Security Reform, with Alan Greenspan as the chairman, recommended this to help solve the Social Security crisis. Supposedly, the tax collected on these benefits would go back into the Social Security trust fund. In 1993, President Clinton signed into law a provision to raise the maximum amount that Social Security benefits could be hit with tax from 50 percent to 85 percent.
Randy McIntyre is a Certified Public Accountant and a partner in McIntyre, Paradis, Wood & Company, CPAs. He has worked in public accounting since 1977, in Wilmington since 1992. His firm is built on a history of service, technical expertise, and innovative to provide the expertise of larger firms with a personal, one-on-one approach. To learn more about McIntyre, Paradis, Wood & Company, see www.mpwcpas.com. He can be reached at [email protected] or 910-793-1181.
Constance Knox, owner of Genealogoy TV and NC Ancestry, shares her top info and entertainment picks....
Some rural areas have experienced the same trends, albeit on a smaller scale, as more-populated communities when it comes to residential rea...
Veteran-owned businesses abound in Wilmington and nearby communities and can be found in the local hospitality industry....