Most workers have heard about Social Security their entire lives and laughed, “Ha! I’ll never see those benefits!” Then, suddenly, those workers are approaching retirement age and thinking about when that “free money” is going to start. But is it free money? Sure, it’s free, in the sense that you don’t need to work to get it. However, a portion of those Social Security benefits could cost you because they are taxable.
If Social Security is going to be your only income in 2021, your benefits will probably not be taxable. If you receive income other than Social Security, such as wages, interest, dividends, capital gains, or net business income, you must do a few calculations to determine whether any of your Social Security benefits are subject to federal tax.
Here’s a quick way to find out if a portion of your Social Security benefits are taxable:
- Determine the total Social Security benefits that you will receive in 2021.
- Multiply the total benefits by 50%.
- Add the 50% of your Social Security benefits received during 2021to all your other income received in 2021, including tax-exempt interest.
- If you’re married and file a joint return, you and your spouse must combine your incomes and Social Security benefits when figuring the taxable portion of your benefits, even if your spouse didn’t receive any Social Security benefits.
- Compare the total from #3 to the Base Amount for your tax filing status:
- $25,000 – For single, head of household, qualifying widow or widower with a dependent child or married filing separately and lived apart from their spouse for all of 2021
- $32,000 – For married filing jointly
- $0 – For couples married filing separately and lived with your spouse at any time during 2021
- If the total from #3 is higher than the Base Amount, a portion of the Social Security benefits above the Base Amount is taxable, up to 85% of the benefits. The higher your income, the higher the percentage of Social Security benefits subject to federal tax.
If you are approaching retirement age and thinking about your “free money” from Social Security, you need to check on whether it really is free. A portion of those Social Security benefits could be subject to federal tax, depending on your other income and your Base Amount.
Have questions? The IRS has answers for you at https://www.irs.gov/faqs/social-security-income.