Under the laws that are presently in place, you may begin to collect Social Security as early as age 62. But if you begin collecting benefits early, your monthly benefit amount will be less than what you would collect if you wait until your full retirement age, which may fall anywhere from age 65 to age 67.
If you have additional income, you may be liable for federal income taxes on your Social Security payments. And if you owe back taxes, Uncle Sam may take a bite out of your benefits as well.
Is Social Security Your Only Income?
If Social Security payments represent your sole source of income, in all likelihood you won’t have to pay federal income taxes on your benefits, unless you are married and file federal income tax returns separately from your spouse. This is because the IRS has established what it calls a base income for Social Security benefits that is exempt from taxes. As a result, unless you earned a very high income while you were working (and are therefore entitled to very large Social Security benefits), the amount that you receive from Social Security alone will probably fall below the tax-exempt base amount.
Calculating Your Combined Income
To determine your base income, you must perform some simple calculations. First, add half of your total annual Social Security benefits to any other income you received for the previous year. Include tax exempt income and any other income normally excluded from taxation.Compare the total to the base amount (listed below) for the tax filing status that applies to you. If the total is larger than the base amount, you may be subject to federal income taxes for at least part of your Social Security benefits.
Your Base Income
The amount of Social Security benefits that the IRS exempts from taxation depends on your marital status and your total annual gross income. For 2014, the base amounts of tax-free income for Social Security recipients are listed below:
- Married Filing Jointly:$32,000
- Single, Head of Household, Qualifying Widow(er) with a dependent child or Married Filing Separately (not living with spouses at any time during the previous year):$25,000
- Married Filing Separately (living with spouses anytime during the previous year): $0
How Much of Your Social Security Benefits are Taxable?
Even if your income is more than the base amount set by the IRS for your filing status, you won’t have to pay taxes on all of your earnings. Instead, the IRS has established a formula to determine what percentage of your benefits is taxable, based on your income and tax filing status. The formula for 2014 federal income tax returns is described below:
Single, Head of Household or Qualifying Widower:
- Income between $25,000 and $34,000: up to 50 percent of benefits are taxable
- Income more than $34,000: up to 85 percent of your benefits may be taxable
Married Filing Jointly:
- Income between $32,000 and $44,000: up to 50 percent of benefits are taxable
- Income more than $44,000: up to 85 percent of benefits are taxable
Married Filing Separately: Up to 85 percent of benefits are taxable
Do You Owe Back Taxes?
The Federal Payment Levy Program (FPLP) allows the IRS to seize up to 15 percent of your Social Security benefits to satisfy a tax levy. Lump sum death benefits, Supplemental Security Income (SSI) benefits and benefits paid to children are also exempt from seizure under the FPLP. In addition, taxpayers with incomes that fall below poverty levels set by the Department of Health and Human Services may also be exempt from seizure of their Social Security benefits.
How to Reduce Your Potential Tax Bite
If your circumstances indicate that you will probably be subject to federal income taxes on at least part of your Social Security benefits, do not despair. Even if you are married and file your federal income tax returns separately from your spouse, you will not have to pay 100 percent of your Social Security benefits back to the federal government. Instead, you will be obliged to include all of your Social Security benefits along with any reported income from part-time earnings or investments.
But the income that you report from your Social Security benefits is entitled to deductions and tax credits just like any other income. Therefore, your final federal income tax obligation may be minimal. Regardless of your circumstances, it is worthwhile to investigate any and all legitimate tax breaks, either on your own or with the assistance of a tax professional.