When you reach the appropriate age, it’s easy to apply for Social Security retirement benefits – just go to Social Security’s website, fill out the online form and you’re essentially done.
But many people overlook the next step – completing Form W-4V, which asks you how much federal income tax you want withheld from your benefits. And if you skip this step, you could face an unpleasant surprise when it’s tax-filing time, because Social Security benefits can, indeed, add to your taxable income.
• If you’re a single filer: If your “combined” income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your Social Security benefits. (“Combined” income includes your adjusted gross income, non-taxable interest, and one-half of your annual Social Security benefits.) If your combined income is more than $34,000, up to 85 percent of your benefits may be taxable.
• If you’re married and file jointly: If you and your spouse have a combined income between $32,000 and $44,000, you may be taxed on up to 50 percent of your benefits. If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable.
These numbers might seem high, but they don’t mean you’ll lose 50 percent, or 85 percent, of your benefits – they are just the percentages of benefits you may be taxed on, at your personal income tax rate.
To help avoid a big tax bill or an underpayment penalty, you can file Form W-4V with the Social Security Administration and request to have 7, 10, 12 or 22 percent of your monthly benefit withheld. Your tax advisor can help you choose the withholding percentage that’s appropriate for you.
The amount of taxes you may need to pay will also depend on when you start taking Social Security. The earlier you take benefits, the smaller your monthly checks, and the smaller the taxes. But taxes should not be a key issue in deciding when you need to begin collecting your payments. Rather, you should consider other factors, such as your anticipated life expectancy, your employment situation, your spending needs and the benefits for your spouse.
Here’s something else to keep in mind. Because Social Security taxes are based on your overall income, the amount of money you withdraw during retirement and where that money comes from can also affect your tax situation.
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