Retirees: Avoid an Unexpected Tax Bill on Your Retirement Income

January 11th, 2019

Many retirees are surprised to learn that part of their Social Security benefits may be taxable. After paying Social Security taxes for a decade or longer, most people do not realize that they may owe state and federal income taxes on their Social Security benefits. Keep reading for a detailed review of how Social Security benefits are taxed, so you can plan and avoid an unexpected tax bill on your retirement income.

How Your Social Security Benefits are Taxed

Starting in the late 1970s, Social Security Administration started having issues with funding. The Social Security Advisory Council suggested reform that taxed 50% of Social Security benefits. It was unusual since Social Security was created in 1935 with the intention for all retirement income to be tax free. Most private retirement benefits were at least partially taxable. In the 1970s, when the Council was considering the changes, it seemed fair to them that half of the benefits be taxed since employers paid half of the Social Security tax on behalf of their employees. Their argument was that since retirees only pay half of the cost of Social Security benefits half of the benefits should be fully taxed. Lawmakers at the time disagreed that all retirees shouldn’t have their Social Security benefits taxed, so they made exceptions for low income individuals and families.

Social Security SSA-1099 Tax Forms

Social Security Administration starts mailing out the SSA-1099 tax forms in January for the previous tax year. The tax forms show the amount of Social Security benefits you received that were reported to the IRS. If you do not receive yours, you will need to wait until February 1st to request a replacement SSA-1099.

How to Determine Your Base Amount to Calculate the Taxable Amount of Your Social Security Benefits

To determine how your Social Security benefits are taxed, the IRS requires taxpayers to compare your base amount with the total of one-half of your Social Security benefits plus all your other income (including tax-exempt interest). The base amount used to calculate the taxable amount of your Social Security benefits is based on your filing status.

Your base amount is:

  • $25,000 if you file as single, head-of-household, qualifying widow(er), or married filing separately and lived apart from your spouse during the tax year;
  • $32,000 if you file as married filing jointly; or
  • $0 if you file married filing separately and lived with your spouse at any time during the tax year.

Example: John and Maria each receive $1,000 a month in Social Security benefits. In January, they receive their SSA-1099s showing $12,000 received for John and $12,000 received for Maria. Their Social Security benefits totalled $24,000. Maria received additional income including $500 interest and $6,000 from her pension. John received additional $6,500 from his pension. For determining the amount of their Social Security benefits that are taxable, John and Maria’s income totalled $25,000 calculated as follows: half of their Social Security benefits $12,000 ($24,000 x 50%) + Maria’s additional income of $6,500 ($6,000 pension + $500 interest) + John’s pension income $6,500. If John and Maria file married filing jointly, their base amount is $32,000. Since their income of $25,000 is less than their base amount, none of their Social Security benefits are taxable.

If your income is more than the base amount, typically, up to 50% of your Social Security benefits will be taxable. However, if either

  • one-half of your Social Security benefits plus all other income is more than $34,000 or $44,000 if you are married filing jointly; or
  • if you file married filing separately and lived with your spouse at anytime during the tax year

up to 85% of your Social Security benefits may be taxable.

Are Social Security Benefits Taxed in Ohio?

In Ohio, Social Security benefits are fully exempt from state income taxes. This means none of your Social Security benefits are taxable on your Ohio state income tax return.

The Bottom Line

Most retirees in Ohio do not have to pay taxes on their Social Security benefits. However, if one-half of your Social Security plus your other income equal more than the base amount, you may owe federal income taxes on part of your Social Security benefits. In Ohio, all of your Social Security benefits, regardless of how much additional income you have, will be exempt from state income tax.

It’s important to plan, so you can avoid an unexpected tax bill on your retirement income. If you are not sure if you are going to owe taxes on part of your Social Security benefits, contact the tax professionals at Gudorf Tax Group for a review. Be prepared! Do not get caught off guard with an unexpected tax bill on your retirement income.