When are your Social Security Benefits Taxable?

Social Security is a significant part of nearly every American’s retirement income.  Depending on an individual’s (or married couple’s) circumstances, these monthly benefits may be subject to Federal and state income taxes.  As we might expect, the calculation is more complex than we’d prefer.

tax2The primary factor for determining whether or not benefits are taxable is what we’ll call “combined income,” which is a number that includes Social Security benefits, all other sources of taxable income (wages, interest, dividends, capital gains, etc), and generally tax-exempt income from state and local municipal bonds.  For married couples with combined income over $32,000, up to 50% of Social Security benefits can be taxable.  If a couple’s combined income exceeds $44,000, up to 85% of their Social Security income can be taxable.

In Colorado, it’s possible that an individual’s Social Security benefit will be subject to state income taxes.  The state grants an exemption for retirement income that may include private-sector pensions, annuities and Social Security.  For individuals ages 55 to 64, this exclusion is $20,000.  For those over 65 it is $24,000. Individuals or families with high Social Security benefits and/or additional pension income could easily see some or all of their benefits subject to Colorado’s 4.63% income tax rate.

It should be noted that planning to control your other sources of taxable income can be a great step towards reducing the taxes you may owe on your Social Security benefits.  Portfolio income in particular should be evaluated to see if unnecessary tax is resulting from an inefficient investment portfolio.

The Social Security Administration will withhold federal income taxes (but not state income taxes) if a recipient would prefer.  Recipients simply must fill out IRS Form W-4V and drop it off or mail it to their local Social Security office.

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