Did you know that your Social Security income may be subject to state taxation in addition to federal taxation?
Wait…hold on. I didn't even know that Social Security income may be subject to federal taxation!
Yes, Social Security income may be taxed at the federal level. We like to call it the Social Security “stealth” tax. Many people are unaware of this tax and don’t plan for it. All of a sudden, it sneaks up on them and they find out they owe taxes based on their Social Security benefits.
Up until 1983, Social Security was not a source of income subject to federal taxation. For almost 50 years after President Franklin D. Roosevelt signed the Social Security Act (in 1935), Social Security was not allowed to be federally taxed. However, in 1983 the Bipartisan agreement was made between President Ronald Reagan and Tip O’Neill (Speaker of the House). This agreement made significant changes to the Social Security program. One of these changes was that a portion of Social Security benefits could be subject to federal taxation.
Federal taxation does not apply to all Social Security beneficiaries as there is a special formula used to determine if your Social Security income will be taxed. If your “combined income” or “provisional income” exceeds a specific threshold, a portion (up to 85%) of your Social Security income will be taxed. These thresholds vary depending if you are a single filer or joint filer.
You can learn more about federal taxation here.
Currently, there are 13 states where your Social Security income may also be subject to taxation. These are the states:
8. New Mexico
9. North Dakota
10. Rhode Island
13. West Virginia
If you live in one of these 13 states, your Social Security income may be subject to taxation. Some of these states use the same calculation as the federal government to determine if single or joint filers owe taxes. Some states have their own rules and regulations. West Virginia may eliminate its state tax and may be off this list soon.
If you live in one of these states, this is just another factor to consider when retiring and filing for Social Security. This doesn’t necessarily mean you should pack up and move to a different state, but it is important to keep in mind.
If you don’t live in one of these states, remember that your Social Security income may still be subject to taxation on the federal level.
No matter where you live, it is important to plan for your retirement and to make the optimal Social Security filing decisions. Understanding who gets taxed and how it is calculated is important and a significant step in your retirement planning process. It is better to be prepared and to know if you will be taxed in the future. You don’t want to be caught off guard.
Consult with a RSSA (Registered Social Security Analyst) and they can help you make optimal Social Security decisions for your particular situation, no matter what state you live in.Click here to view the original published article
Share This Article
Trending topics & tools for the CPA community
Entigrity is the number 1 offshore staffing firm for CPA & accounting firms. Supporting 500+ clients nationwide. Hire experienced professionals starting at $10/hour. Start planning your staffing requirements for the coming tax season.
Content originally appeared on the CPACharge blog.If there’s one universally agreed-upon sentiment about accepting credit cards in your business, it’s this: credit card processing rates......