The basic rule is that income from any source is taxable unless it is exempt. Retirement income is taxable unless, by some other provision of the law, it is exempt. Social security benefits are exempt if they are the individual’s sole source of income. When an individual or couple, if filing jointly, has income from other sources, one must calculate tax liability. Similarly, income from annuities, pensions, and retirement accounts may be taxable unless exempt.

Calculating Social Security Taxes

Retirees and those concerned with the question of social security income taxes can use a retirement tax calculator to determine what part if any, of retirement income, is taxable. Social security recipients can work or have other sources of income, and that will not affect social security unless it passes a certain amount. Then portions of social security can be taxed up to a maximum amount. It is usually half but no more than 85 percent of the social security benefits amount can be taxed. Persons whose income comes completely from social security benefits will not have a tax liability and as a general rule will not have to file a tax return.

The Formula

One must determine two factors, the base and the provisional income. The base is the amount of income permitted without taxation; The provisional income is the total of income from every source. For most categories, the base is $25,000, and the provisional income amount is $34,000. These are the numbers that will determine the amount of taxable social security income. There are status factors that affect the base amount. The base is zero for married filing separately. The base is $32,000, and provisional income limit is $44,000 for married persons filing jointly.

Applying the Retirement Tax Calculator

Withholding may be the best course for many persons who can potentially have tax liability on provisional income. The retirement tax calculator is an excellent tool for determining potential liability and for setting a reasonable level of social security withholding. The maximum possible taxable amount for most taxpayers would be the sum of $4,500 plus eighty-five percent (85 percent) of social security. The tax rate would apply to that total. Most taxpayers will have taxation for up to half of their social security benefits with provisional income falling between the base and the provisional limit. When income exceeds the provisional limit, up to eighty-five percent of social security may be taxed.

Withholding on Retirement Benefits

One can calculate the total potential tax liability and authorize withholding the cover all or part of the expected tax obligation. One may also elect to withhold additional funds from sources of provisional income. Taxpayers can elect to pay quarterly taxes to cover any potential end of year obligation. The goal is to cover the tax liability and file an annual return for refund of any excess payments.

Strategies to Reduce Taxation

One can use restrictions on income to reduce the amount of social security taxes. One can use deductions to protect income. For example, it may be possible to reduce the amount of taxable benefits or income in periods in which one does not have deductions or has used up deductions. It may be possible to increase taxable income payments during times when one has the advantage of deductions. Adjusting the timing of payments can help reduce taxes on social security.

IRS Topic 423
IRS Publication 915