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The Social Security program provides a critical safety net for 60 million Americans, but that doesn't mean that everyone knows all there is to know about it. For example, did you know that you may pay income taxes on up to 85% of your Social Security income? Read on to find out more about how the Internal Revenue Service taxes Social Security benefits.
First, a little background
Social Security provides monthly payments to recipients who qualify for the program. To qualify for Social Security, you need to have earned 40 work credits. Most Americans can earn those necessary credits over a 10-year career.
If you qualify for Social Security, you can claim benefits at any point between age 62 and 70. But because Social Security is designed to pay you the same amount over your lifetime, claiming early will result in smaller monthly checks than when you claim later. You should also know that full retirement age is the age at which you can collect 100% of your monthly benefit, and that age varies depending on the year you were born.
Data source: Social Security Administration.
If you claim Social Security at age 62 and your full retirement age is age 66, then your monthly Social Security check will equal about 75% of the amount you would otherwise have received if you waited to claim until age 66. If you claim early, you have one year to change your mind before you're locked into that lower monthly payment for your lifetime.
Since the majority of Americans do claim Social Security at 62, it may also be helpful to know that you can continue working while collecting Social Security, but income earned above annual limits results in your monthly Social Security check being reduced by $1 for every $2 earned. In 2016, the income limit is $15,720. If you're over full retirement age, then you can earn as much as you want without reducing your Social Security income. However, working can increase the likelihood that your Social Security income will be taxed (more on that in a minute).
Finally, any Social Security that gets withheld because of earned income will increase your monthly Social Security check once you reach your full retirement age.
The taxman cometh
If you work and collect Social Security, there's a good chance you'll end up paying taxes on at least some of your Social Security income.About one-third of all Social Security recipients pay taxes on their Social Security income and the majority do so because they earn income that exceeds specific limits.
The IRS determines how much of your Social Security is taxed by calculating your provisional income, which is equal to 50% of your Social Security income plus other income, such as self-employment income, pension income, interest earned, and dividends. You can learn more about provisional income here.
If after those numbers are totaled the amount eclipses specific limits, the IRS can tax up to 85% of your Social Security benefits.
For example, if you're single and your provisional income is between $25,000 and $34,000, you can owe taxes on up to half of your Social Security benefit. If you earn more than $34,000 in combined income, you could be taxed on 85% of your benefit.
Married couples with provisional income that's between $32,000 and $44,000 could pay taxes on up to half of their benefit, and couples earning more than $44,000 in provisional income may be taxed on up to 85% of their Social Security benefit.
Data source: The Motley Fool/IRS.
If you receive Social Security, the Social Security Administration will send you an SSA-1099 form every year that tells you what you collected and a worksheet that will help you determine if any of your Social Security benefit is taxable.Calculating your exact tax on Social Security can be complicated, so it pays to double-check your numbers and consult with an accountant if you have questions.
If you do think you'll owe taxes on your Social Security income, consider avoiding a surprise at tax time by having your federal taxes withheld directly from your monthly Social Security check. You can request withholding federal taxes from Social Security by filing W-4V with the IRS (download that form here). If you prefer not to have money for taxes withheld monthly for your Social Security, you can also pay quarterly estimated tax payments instead.
The article If I Receive Social Security, How Much Will I Pay in Taxes? originally appeared on Fool.com.
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