What are the tax consequences if we take our Social Security benefits at full retirement age (66 years and 6 months for both of us) and continue to work? How old can we work and collect Social Security benefits without having to pay taxes on them? Signed: Stressed-out Husband and Wife
My Dear Overwhelmed Family: Whether or not your Social Security benefits are taxable is solely dependent on your income as reported to the Internal Revenue Service, regardless of when you apply for them. Social Security benefits are subject to federal income tax even if you begin receiving them after reaching your full retirement age.
If you receive Social Security benefits, the amount of tax you owe is based on two factors: first, the total amount of your earned income (also known as your “MAGI”), and second, whether or not you have filed a tax return for the previous year (whether you file your income taxes individually or jointly as a married couple). My adjusted gross income (MAGI), which includes half of my Social Security benefits and any other non-taxable income I may have received, constitutes my “MAGI.”
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Some of your Social Security benefits are taxed at your normal IRS tax rate if your MAGI for the year exceeds a set number of thresholds. In the case of married couples filing joint income tax returns, if your MAGI is more than $32,000, 50% of your Social Security benefits are included in your overall taxable income at the standard tax rate for your income. However, if your MAGI as a couple for the tax year exceeds $44,000, then up to 85 percent of your Social Security benefits are included in your taxable income. Social Security benefits are not taxable if your MAGI as a married couple is less than $32,000.
As a single taxpayer, your federal income tax filing thresholds are lower than those of married couples. Social Security benefits aren’t taxed if your MAGI as a single filer is $25,000 or less. Your Social Security benefits aren’t taxed as long as your MAGI is less than $25,000, but if your MAGI is over $34,000, up to 86% of your benefits are taxed. However, those who are married but choose to file their taxes as “married – filing separately” should be aware that the Social Security benefit tax threshold is zero if you file separately and live together at any time during the tax year.
As a result, the federal taxation of your Social Security benefits is based solely on your combined income from all sources and your income tax filing status, even if you are receiving benefits after your full retirement age. A dozen US states to levy an income tax on Social Security benefits, so it is important to check the tax laws in your state of residence to see if some or all of your benefits will be taxed by your state of residence.