Although you've paid in to the Social Security system with a portion of your wages, the funds you draw in retirement may still be subject to income tax. It all depends on your filing status and the amount of other income you earn in addition to Social Security. The relatively straightforward guidelines and income thresholds are based on your "combined income." If you plan on working and taking Social Security, keep these rules in mind.
Key to the calculation of taxes on Social Security is "combined income," as defined by the Internal Revenue Service. Your combined income is the sum of your adjusted gross income, all nontaxable interest and one-half of your total Social Security benefits. The Social Security Administration keeps track of your total benefits throughout the year and in January issues an SSA-1099 form, also known as a benefit statement, showing that amount.
Taxing the Benefits
The IRS does not enforce a separate tax rate for Social Security benefits. Instead, it subjects a certain percentage of your total benefits to tax at the ordinary rates that apply to the rest of your income. If you're a single filer, for example, and earn a combined income of more than $34,000, 85 percent of your Social Security benefits are subject to income tax. If your combined income is between $25,000 and $34,000, then 50 percent of your Social Security benefits are subject to tax. With combined income of less than $25,000, your Social Security is tax free.
Those filing married, joint returns have slightly higher thresholds. Married couples with combined income of less than $32,000 do not pay tax on their Social Security. Combined income between $32,000 and $44,000 means a tax on 50 percent of the benefits, while combined income over $44,000 means 85 percent of the benefits are subject to income tax.
Married and Separate
If you're filing married but separate returns and lived with your spouse during any part of the tax year, 85 percent of your Social Security benefits are taxable, no matter what your combined income level is. The rule may seem a bit harsh, but the federal tax rules generally like to discourage people from filing separate returns while still living together just for the sake of lessening their income tax rates. If you file as married, separate and lived apart from your spouse throughout the tax year, the thresholds for single filers apply.