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Social Security Checks and Tax Filing

Posted by Peter DeMarco on Sep 26, 2013 9:10:00 AM

Collecting social security benefits marks a significant milestone in your life. After a lifetime of contributions, receiving benefits is a reward for your hard work. Before you draw your first social security check, as part of your overall retirement planning strategy, you'll want to understand how your benefits will affect your taxes.  

Federal Tax Filing  

The federal government taxes most social security recipients. Individual taxpayers who earn more than $25,000 -- and couples filing jointly who earn more than $32,000 -- pay federal taxes on up to 50 percent of  their benefits. Higher-income taxpayers pay federal taxes at their marginal tax rate on up to 85 percent of their social security income. The good news is that 15 percent of your benefits aren't taxed at all.  

State Taxes on Social Security  

State income tax treatment of social security income is a mixed bag.  Ohio is one of 36 states that don't levy income taxes on benefits. The 14 states that do include benefits in taxable income --  Colorado, Connecticut, Iowa, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico , North Dakota, Rhode Island, Utah, Vermont and West Virginia -- apply different taxation formulas. Colorado, for instance, only taxes a portion of your benefits, but Connecticut and West Virginia treat your social security income just like the federal government does for taxation purposes. Kansas doesn't collect taxes on benefits for individuals whose adjusted gross income is less than $75,000. Tax treatment of other retirement benefits is similarly disparate. If you plan to move to another state after you retire, be sure to research how your social security will be taxed.  

Retirement Planning  

Getting tax advice before you apply for Social Security is an important part of your overall retirement strategy. Knowing how your benefits affect your situation can save you thousands of dollars or more. For example, income from Social Security can nudge your adjusted gross income over the limits for contributing to a Roth IRA or for claiming education credits for a child attending college. A tax professional can analyze various scenarios for you and help you decide whether it makes sense to start claiming benefits now or whether collecting social security now would be "penny wise and pound foolish."  

Estate Planning  

Social security provides survivor's benefits for your spouse and any children who are minors at the time of your death. These benefits represent an adjusted percentage of your benefit based on when you claim benefits and your spouse's age when you pass away. Under some circumstances, a former spouse can also claim benefits based on your social security earnings record. How taxes affect your beneficiaries' survivor benefits depends on several different factors. A professional accountant can advise you based on the facts of your situation. 

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Topics: Tax Planning & Strategies

Peter DeMarco

Peter DeMarco

Peter DeMarco, with nearly three decades of tax planning experience, is a Vice President at Meaden & Moore as well as Director of the Tax Services Group.