We all know this time of year well. Either get excited for a return or dread liability for more taxes.
When gross income is greater than your exemption amount plus the standard deduction, chances are you will end up owing the government money.
If you receive some Social Security benefits, you may think you are rid of this arduous process but no such luck!
History of Social Security Taxation
The good news is that households of the non-elderly pay almost double the taxes of the elderly, so you may not have to pay as much as expected. The government gives preferential treatment to those who saved for retirement, and Social Security income is taxed differently.
If Social Security is your only income, you may even be able to stop filing taxes! For the first 50 years of the program’s existence, it was not taxed at all; however, due to decreased incomes and increased reliance on the program in the 1980’s, Social Security benefits started getting taxed.
Potential Taxable Income
While you may be retired, there are other forms of income you receive. Traditional IRA and 401(k) accounts are taxable and count as income. Roth IRAs are slightly different, and withdrawals cannot be taxed if you retire past the age of 60.
Past the age of 70, you also do not have to take Requires Minimum Distributions (RMDs) from your Roth. Additionally, stocks, bonds, real estate, and other investments can be taxed up to 15% depending on your tax bracket.
This is why many financial advisors recommend using up taxable accounts, then tax-deferred retirement accounts, and finally Roth IRAs.
When You Must File Taxes
If you are over the age of 65 and live alone without any dependents on an income of more than $11, 850, you must file an income tax return. If part of your income comes from Social Security, you do not need to include this in the gross amount.
If you are married and both are over 65-years-old, your combined income cannot exceed $23,100 if you plan to stop filing taxes. If your spouse is younger than you (and younger than 65), this amount decreases to $21,850.
Remember – do not include Social Security in your gross income! This will drastically alter your income amount.
When You Can Stop Filing Taxes
If your income comes solely from Social Security benefits, you can stop filing taxes. This is because taxed income does not include the benefits. Therefore, your gross income is technically $0 without Social Security.
This can seem confusing, so follow the directions on the 1040 and 1040A forms, which help to calculate the taxable amount of Social Security benefits.
Just because you are exempt from federal taxes, does not mean you are also exempt from state taxes, so be sure to check with a state representative for specific rules and regulations to follow.
Always consult an IRS representative or a local financial consultant if you have any questions about your situation. Wouldn’t it be nice if we could all stop filing taxes?