Managing your tax liability effectively during retirement is important, especially since up to 85% of Social Security benefits can be taxed depending on your income. So, how can you avoid the surprise of owing the IRS more than you expected when tax season arrives? While not required, choosing to have taxes withheld from your Social Security checks is an option.
Here's what else you need to know.
Related: Types of Income the IRS Doesn't Tax
Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
Taxes on Social Security
It's essential to plan if you know some of your Social Security benefits will be taxed. As a general rule, if Social Security is the only source of income, it might not be taxable. However, the IRS will likely tax some of your Social Security benefits if you have additional retirement income from pensions, another job, retirement account distributions, etc.
The amount of Social Security benefits subject to tax depends on an IRS formula. That formula is based on “combined income” and considers your adjusted gross income, nontaxable interest, and half of your Social Security benefits.
Generally, if your combined income (50% of your benefit plus any other earned income) exceeds $25,000/year filing individually or $32,000/year filing jointly, you may have to pay federal taxes on your benefits.
For more information, see Kiplinger’s guide: Calculating Taxes on Social Security Benefits.
Federal withholding tax from Social Security
As mentioned, one way to avoid tax surprises is to have federal income taxes withheld from your Social Security payments.
- To do this, complete IRS Form W-4V, Voluntary Withholding Request, and submit it to your local Social Security office.
- You can choose a withholding rate of 7%, 10%, 12%, or 22%.
- You can change or stop withholding by completing and submitting a new W-4V.
Note: Changes in your income, tax laws, and inflation-adjusted amounts such as the Social Security COLA, may necessitate withholding changes. Review your withholding elections periodically to determine the best withholding rate for you.
Estimated tax payments on Social Security income
If you prefer not to have taxes deducted from your monthly Social Security payments, you can make quarterly estimated tax payments to the IRS. That can help you avoid underpayment penalties since the U.S. tax system operates on a "pay-as-you-go" basis. That means the IRS expects you to pay a portion of your income as soon as you earn it.
- When paying estimated taxes, you usually make four equal payments and follow the IRS's yearly schedule.
- People also call estimated tax payments "quarterly" payments, even though the payments might not necessarily be three months apart or cover three months of income.
For more information, see Kiplinger’s report on estimated tax payment due dates for 2024.
Regardless of the method you choose, withholding tax from Social Security and making estimated tax payments help ensure you have paid sufficient tax. You want to avoid an underpayment penalty from the IRS when you file your income tax return. According to the IRS, estimated tax underpayment penalties depend on several factors, including the amount of underpayment, the period when the underpayment was due, and the interest rate for underpayments that the agency publishes each quarter.
To avoid underpayment penalties, you will want to either withhold or make estimated payments equal to 90% of your tax liability for the current year or generally 100% of your tax liability for the previous year.
States that tax Social Security in 2024
While federal taxes may apply to Social Security benefits, not all states tax them. It helps to remain aware of state tax laws and state tax changes to understand if Social Security benefits are subject to state income tax. Also, see Kiplinger’s report on states that still tax Social Security.
Taxes in retirement can be complex, especially for retirees with multiple income sources. Staying informed and consulting with a tax professional can provide personalized advice. That guidance might help you make informed decisions regarding your Social Security withholding and overall tax strategy.
Related
-
With Fixed Indexed Annuities, Zero Is Your HeroFixed indexed annuities are retirement tools that can offer potential growth as well as principal protection by limiting market risk. Here's how they work.
-
Before Buying Your First Home, Get These Three Ducks in a RowWith mortgage rates higher than we're used to, making sure you can comfortably afford to buy your first home is more important than ever.
-
Is an Annuity Worth It? Tax Pros and ConsRetirement Knowing how an annuity might impact your tax situation can be confusing. Here are some advantages and downsides to consider.
-
Incorrect ERC? IRS Points to Five New Red FlagsTax Credits These signs could mean there’s an error in your Employee Retention Credit claim.
-
Five December 31 Tax Deadlines for RetireesThe end of the year will be here before you know it, so it might be a good idea to start thinking soon about what you need to do for taxes before it arrives.
-
Will North Dakota Property Tax Be Eliminated?Property Tax A new property tax proposal will be a key ballot item for the Peace Garden State.
-
IRS Has No Set Plan to Replace Old TechIRS What could old IRS technology mean for your federal tax return and cybersecurity?
-
What Time is the Mega Millions Drawing?Lottery Tax With a high-stakes jackpot, the payout (less some tax) is anyone’s to win.
-
IRS Back Taxes Scam Call Steals MillionsScams IRS fakes are cheating thousands of people out of “overdue tax debt.” Are you next?
-
Unrealized Gains Tax: One Important Thing to Know NowCapital Gains Unrealized capital gains have taken center stage in election discussions about tax fairness and economic policy.
