Tax on Social Security Written in a Notebook

Social Security Voluntary Withholding

As the 2022 tax season closes, consider making things in 2023 easier. If you had to pay more tax than you planned this year, perhaps it was because of the income from your Social Security.

The History of Social Security Tax

Up until 1983, Social Security payments were always income tax-free. In 1983, many of the rules we follow today were adopted. Income tax was introduced to help fund future Social Security payments. After the law was passed, the Social Security Administration immediately asked the IRS to develop a formula to calculate the amount of the income tax due on the benefit payments.

How to Calculate Social Security Tax

By 1985, the IRS released the Social Security tax formula we follow today. The first important thing to understand is the definition of “combined income.” Combined income is your adjusted gross income, plus non-taxable interest income, plus 50% of your Social Security payment. See more here.

Once you have calculated your combined income for the year, you can check and see if any of your Social Security benefit will be reported as income. Reference this chart here.

  • File a federal tax return as an “individual” and have your combined income is:
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • File a joint return, and you and your spouse have a combined income that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $44,000, up to 85 percent of your benefits may be taxable.
  • Are married and file a separate tax return, you probably will pay taxes on your benefits.

 

Even at higher income levels, no more than 85% of your Social Security benefit will be reported as income.

This gives Social Security benefits a 15% advantage over money taken from a traditional IRA or similar tax qualified account. In retirement, Social Security dollars go a long way because of this 15% tax free advantage.

Withhold Social Security Tax to Avoid a Penalty

You can voluntarily elect to have money withheld from your Social Security check to help pay for those taxes.

It can be a big surprise to see no withholding from your Social Security payments caused you to pay a penalty tax for underpayment during the year.

How to Have Social Security Tax Withheld

Withholding money from your Social Security payment for income tax is not automatic. However, it can easily be initiated by completing the Voluntary Withholding Request Form, W-4V.

The W-4V only allows four choices of voluntary withholding amounts: 7%, 10%, 12%, and 22%.  Check with your tax advisor to determine which amount is best for you. You can change the withholding amount, but that requires you to complete and submit a different W-4V.

It is best to find a percentage that works for you without the need to change the percentage each year.

Keep in mind the combined income test amounts are not indexed for COLA (Cost-of-Living Adjustment), changes.

Without indexing, this could expose more and more of your Social Security benefits to income tax next year.

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