Of course they’re taxable. There’s a little more to it though, so keep reading if you’re really old.
How much of my benefits are taxable?
Like every other tax question you’ve ever asked me, the answer to this is “it depends.” However, there are a couple of really simple rules that can answer this for most people. First off, if social security or disability is your ONLY income, your benefits will likely not be taxable. You may not even be required to file a tax return. If you do, your tax liability will likely be $0. This may be true even if you have small amounts of other income. The more income you have outside of social security, the more taxable income you’ll have from your social security benefits.
The second rule is that for anyone with around $50,000 or more in income outside of social security, it’s very likely that exactly 85% of your benefits will be taxable. This is the maximum amount of social security benefits that can be taxable. That means that if you have $50,000 in gross social security benefits before deducting any Medicare or voluntary income tax withholding, $42,500 will likely be taxable income reported on your personal tax return. When I say “other income”, I generally mean wages, interest, dividends, IRA distributions, pension income, capital gains, tax-exempt interest, and most other income.
If you are somewhere in between these two thresholds, there is a surprisingly complicated worksheet that gets filled out to determine how much of your benefits are taxable. You can find that worksheet here on page 16 if you care (you do not). This gets filled out each year when I file your taxes if you have social security benefits.
Should I withhold taxes on my social security benefits?
Guess what? It depends. Withholding any tax on anything is simply taking a guess at your tax liability for the year and trying to pay ahead. The problem is always that we don’t know what your tax liability is until we file a tax return for you the year after. If you are newly retired and have other income outside of social security, it’s a good idea to withhold some tax the first year to see how things shake out. If you are retired and social security is your ONLY income, you should not withhold any tax on your benefits. Doing so will only require that you file a tax return to get your money back, which is a waste of time, money, and potential interest on your money. If you still aren’t sure about whether or not you should be withholding tax, you can always contact me to run a tax projection for you. This costs money, but it’s worth doing if you hate surprises at the end of the year.
If you are an Illinois resident, the good news is that none of your retirement income is taxable here (for state income tax purposes, that is). Many grumpy Illinoisans like to flee the state around retirement age because they’re tired of all these damn taxes. However, Illinois has a pretty competitive income tax rate during retirement compared to other states in the country. Hence the Illinois state slogan, “Illinois. Come here and die.” Property taxes here are still very painful though, so evaluate all of the taxes in your tax world before deciding to ship off to Indiana. Better yet, head to Florida. There are no state income taxes there and it’s slightly warmer.