Taxes In Your Social Security: 3 Things You Should Know
Regarding Social Security, there is often uncertainty and disinformation regarding how taxes are applied. One prevalent misconception is that Social Security payouts are entirely tax-free. However, it has been the case for many years that some amount, up to 85%, of your Social Security benefits may be taxable, depending on your income.
The amount of your Social Security benefits taxed fluctuates. As a result, it is critical to understand how taxes on benefits work and how they can affect your financial condition.
To get you started, here are three essential facts concerning Social Security taxes:
Certain Social Security income is taxed.
First, not all of your Social Security benefits are taxable. Your income determines how much of your benefits may be taxed.
The IRS has a tiered structure based on "combined income." (Combined income equals your adjusted gross income plus nontaxable interest and half of your Social Security payments for the year.) Box 5 of your Social Security benefit statement (Form SSA-1099) shows the net benefits you receive.
According to the IRS, your benefits may be taxable if your aggregate income exceeds the base amount for your filing status.
Your income is more important than retirement age.
The tiered structure illustrates how much your income counts. However, there are numerous myths regarding Social Security benefits becoming tax-free once claimants reach a particular age.
Whether and how much you pay in income taxes on your benefits is primarily determined by your income and filing status (rather than age).
Social Security COLA increases can affect your taxes.
The cost-of-living adjustment (COLA) has an impact on Social Security taxes. COLA increases might force specific recipients to move into a higher federal income tax rate, especially when inflation has been significant in recent years.
Social Security's COLA for 2024 is 3.2%. This is a massive reduction from the 8.7% COLA in 2023, the highest in more than 40 years.
