I often receive questions about social security benefits and whether it is considered taxable income, especially by the state of California. The answer is: it depends. Social security benefits are not taxable by the state of California. However, social security benefits may be taxable by the federal government. Let’s look at why this may or may not be the case for taxpayers.
Social security tax is collected in the form of a payroll tax mandated by the Federal Insurance Contributions Act (FICA) or a self-employment tax mandated by the Self-Employed Contributions Act (SECA). Every employee, or self-employed individual, should be paying taxes each paycheck toward social security. This money funds the social security benefits a person receives.
When it comes time to collect your social security benefits — generally around the age of 62 — some individuals will be required to pay federal income taxes. This typically happens if the taxpayer has other substantial income in addition to social security benefits. This may include self-employment, interest, dividends from retirement accounts, and other taxable income.
The Internal Revenue Services (IRS) requires you to pay tax on a portion of your social security benefits based on your income and filing status. If you are single, filing individually, with a combined income of between $25,000 and $34,000, you are required to pay income tax on up to 50 percent of your social security benefits. If you have a combined income of more than $34,000, you will pay up to 85 percent on the benefits.
If you file a joint return, and you and your spouse have a combined income that is between $32,000 and $44,000, you will pay income tax on up to 50 percent of your social security benefits. If you have a combined income of more than $44,000, you will pay up to 85 percent of your benefits.
If you are trying to calculate what you may have to pay in income tax for social security benefits, you can use your annual Social Security Benefit Statement (Form SSA-1099) as a guide. Each January, the Social Security Administration sends a statement showing the amount of benefits you received in the previous year. Use that to determine the income tax you may need to pay.
An experienced tax professional can help you determine what you may have to pay in federal tax with social security benefits. Remember, California does not tax social security. Talk to a tax attorney if you find yourself receiving information requesting that.
Allison Soares is a partner and tax attorney at Vanst Law. It doesn’t matter the issue: audits, collections, appeals, international disclosures, grumpy people— Allison enjoys fixing problems. In addition to her legal work, she has worked in accounting and utilizes that knowledge to her advantage while handling cases involving EDD audits.