Ask Rusty – About Income Tax On Social Security Benefits

Dear Rusty: I just started receiving my Social Security in February of 2023. I am also working part time at a company 24 hours a week. My question is… I feel like I missed something when I signed up for Social Security because they are not taking any taxes out. What did I miss? How do I go about fixing it so I don’t get hit at the end of the year? They are taking taxes out of my paycheck now, do they still take it out of my Social Security because I am working? Please help if I am not doing something right. Signed: Conscientious Senior

Dear Conscientious: Unfortunately, when the Social Security Administration processes your application for benefits, they don’t usually inform you that your Social Security benefits may become part of your taxable income. I expect that’s because your benefits only “may” become taxable – they do not definitely become taxable, because Social Security benefits are taxed only if you exceed a certain income threshold. 

The thresholds at which Social Security benefits become part of your taxable income are different depending on your income tax filing status – those who file as an individual have a different threshold from those who file as “married – filing jointly.” And to further complicate matters there is more than one threshold for both individuals and joint filers. Here’s how it works:

• If you file your income tax as an individual and your “combined income” from all sources is more than $25,000, then 50% of the Social Security benefits you received during the tax year becomes part of your overall taxable income at your particular IRS tax rate. But if your combined income as an individual tax filer is more than $34,000 then up to 85% of the SS benefits you received during the tax becomes part of your overall taxable income.
• If your income tax filing status is “married – filing jointly” the thresholds are higher – if your combined income from all sources as a married couple exceeds $32,000 then 50% of the Social Security benefits you received during the tax year becomes part of your taxable income. But if your combined income as a married couple exceeds $44,000 then up to 85% of your SS benefits received during the tax year are taxable.

“Combined income” is also known as your “Modified Adjusted Gross Income” or “MAGI.” Your MAGI is your Adjusted Gross Income on your tax return, plus 50% of the Social Security benefits you received during the tax year, plus any non-taxable interest or untaxed foreign income you had (note that withdrawals from a Roth IRA are not included). If your “MAGI” exceeds the above thresholds, some of your Social Security benefits are taxable; if you are under the first threshold for your IRS filing status they are not.

Social Security doesn’t automatically withhold taxes from your monthly benefits, and the FICA tax being withheld from your earnings are not used for that purpose. Everyone who works and earns must pay SS tax on their earnings, which are mandatory contributions supporting the federal Social Security program. But that FICA payroll tax has nothing to do with income tax on your Social Security benefits. If you are working 24 hours per week and also collecting Social Security benefits, you will likely exceed the threshold for your tax filing status, which means that at least some of your 2023 benefits will become taxable. That could, as you suspect, result in a surprise “hit” when you file next year’s income tax return. Nevertheless, fixing this is quite easy:

Download IRS form W-4V from the IRS website here: www.irs.gov/pub/irs-pdf/fw4v.pdf. You will be able to choose the percentage of your Social Security benefits you wish to have withheld for income tax purposes. Complete the form and mail it to your local Social Security office (get the mailing address here: www.ssa.gov/locator). Social Security will then start withholding income tax from your monthly Social Security benefit payment, which will mitigate any additional tax due when you file your 2023 tax return next year.

-This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity. To submit a question, visit our website (amacfoundation.org/programs/social-security-advisory) or email us at [email protected].