Tax season usually means a refund for most workers, but if you’re retired, you might owe money to the IRS instead.
How much you owe depends on how much you withdrew from your retirement accounts during the year and whether those withdrawals were from pre-tax or Roth savings. Plus, your retirement account withdrawals might not be your only taxable income.
The federal government can tax up to 85% of your Social Security benefits, and nine states also tax benefits for some residents.
These taxes can surprise some retirees and cost them thousands of dollars each year. But you can take steps to avoid an unexpected tax bill in the future.
How Social Security Taxes Work?
To understand if your Social Security benefits are taxable, you need to know how the IRS calculates it. The key factor is your provisional income, which includes:
- Your adjusted gross income (AGI)
- Nontaxable interest from municipal bonds
- Half of your annual Social Security benefits
If your provisional income is below $25,000 for a single filer or $32,000 for a married couple, your Social Security benefits likely won’t be taxed.
But if your income exceeds those limits, you might owe taxes on a portion of your benefits.
These thresholds haven’t changed in over 30 years, so as incomes and Social Security benefits increase, more people could face taxes on their benefits unless future laws change.
If you owe taxes on your benefits, the taxable portion is added to your other taxable income when calculating your total tax bill.
If you owe the IRS money, you can either pay it all at once or set up a payment plan. Keep in mind that payment plans come with a 0.5% monthly penalty, up to a maximum of 25% of your total balance.
If you owe taxes on your Social Security benefits this year, chances are you’ll owe them again in the future.
One way to reduce or avoid these taxes is by using Roth savings for withdrawals since these generally don’t count toward your provisional income.
However, this might not always be possible depending on your financial situation.
How to Plan for Social Security Taxes?
To avoid a surprise tax bill, you can ask the Social Security Administration (SSA) to withhold taxes from your monthly benefits.
While this will reduce your monthly payment, it helps you avoid a large tax bill when you file your tax return. If the SSA withholds more than needed, you’ll get a refund when you file.
You can set up withholding by submitting Form W-4V to the SSA. The form requires basic information like your name, address, and Social Security number. You can choose to have 7%, 10%, 12%, or 22% withheld from your benefits.
Choosing a higher withholding rate reduces the risk of owing money at tax time, but it means you’ll receive less each month.
A lower withholding rate allows you to keep more of your benefits each month, but you might owe some taxes later.
If you’re unsure which option is best, consult a tax professional for personalized advice.
Once you’ve completed Form W-4V, mail it to the SSA. You’ll receive confirmation by mail. If your financial situation changes, you can adjust or stop the withholding by submitting a new Form W-4V anytime.
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