Are Social Security Benefits Taxed After Age 66?
Americans are eligible for Social Security Benefits beginning at the age of 62. However, most seniors will often wait for a later age to start collecting their benefits. This is especially true because the longer they wait, the more benefits they will receive.
Social security benefits are taxable, but it depends on various factors including age and income. Some states assess their taxes differently and therefore, it may depend on where you reside.
The key takeaways in this article, “Are Social Security Benefits Taxed After Age 66” is to confirm that Americans might or might not be taxed on their Social Security benefits after the age of 62 and the same is true for the age 66 and beyond.
In most cases, it will depend on the other income that the Social Security recipient earns. If there is no other income, then you are exempt from paying federal income taxes. If you are earning another income in addition to your Social Security benefits, then the IRS has a threshold that will help you do a comparison to determine if the income is taxable or not.
Making the Determination
If you want to know whether your Social Security benefits are taxable or not, there are ways to determine this.
If you are only receiving a pension on a monthly basis, and you are over the age of 62, then your benefits are not taxed by the government.
If you work part-time or full-time and if you are earning additional income outside your pension, then you could be taxed.
If you are receiving interest income from an investment, for example, you are supposed to add half of your yearly Social Security benefits to that income stream and then make a comparison with the results using the IRS threshold. If the result is above the IRS threshold, then you might have some of your pension taxed by the IRS.
If you were married and filed separately, even though, you lived together as a couple, you would have zero threshold and so, you would have to pay taxes on your pension, no matter, if you were earning an additional income or not.
The Formula
If you wanted to calculate your income (pension and other income earned), then you would add the non-taxable interest income plus the adjusted gross income and half of your pension. The ‘other income’ earned is part of the adjusted income and could come from the withdrawal of your 401K or from a full-time or part-time job. Let us get into the specifics of this formula.
If you want to know about the taxation of your Social Security benefits after age 62 or 66, then read the following. Half of your pension is taxed on any income earned between $25,000 to $34,000, if you are single and from $25,000 to $44,000 if you are married and filing jointly. If your income is more than $34,000 and you are single, then your Social Security benefits will be taxed up to an amount of 85%. If you are married and making more than $44,000 combined, it is the same 85% taxation.
The States
There are several states that, under specific circumstances tax people’s Social Security benefits. These are the states in question:
- Kansas
- New Mexico
- Colorado
- Minnesota
- Connecticut
- Montana
- Nebraska
- Missouri
- West Virginia
- North Dakota
- Utah
- Vermont
- Rhode Island
Minnesota, Vermont, North Dakota, and West Virginia use similar tax rules as the IRS does when it comes to taxing your pension. Therefore, if you reside in any of these states, you will end up paying the normal income tax rates, if your pension is taxed, which is up to 85% of your pension. The other states, among the thirteen listed above, use IRS rules to tax pensioners, but they also offer exemptions or deductions based on income or age. Therefore, it is more than likely that you won’t have to pay tax on your pension for the full amount. Thirty-seven other states, including Washington DC, do not tax anyone’s Social Security benefits.
Before 2014, the state of Iowa was known for assessing taxes on people’s Social Security benefits. However, the process was phased out completely. In New Mexico, Social Security benefits were exempted for pensioners who were 65 years old and over. The other thirteen states use various methods of tax pensioner’s benefits and this includes the use of adjusted gross income as discussed earlier.
An Example
Let us use an example to explain Social Security taxation:
Say Paul and Andrea are a married couple and retired, but filing their income tax jointly and they both have part-time employment. Andrea has earned an income of $12,000 from her part-time job. Paul has earned an income of $18,000 from his part-time employment. In addition to this, the couple has an investment income of $10,000. This includes municipal bonds with an interest income of $5,000, which is tax-exempt. The couple’s Social Security benefits total $20,000 annually. They have a total combined income of $50,000. This includes their wages of $30,000 plus the $10,000 in investment income and half of the $20,000 in Social Security benefits. This amount is more than the allowed $44,000 IRS threshold. Therefore, they will have to pay taxes on 85% of their pension. In addition, they would also have to be taxed for income earned from wages from their part-time employment. For anyone earning money beyond the threshold for couples and singles, then their income taxes would be higher. Why would that be the case? Each dollar earned over the threshold of 85% results in $0.85 of benefits being taxable. The extra income would also be taxed.
For those planning to stay in the workforce after retiring, it is best to think about waiting to claim Social Security benefits.
Waiting after the full retirement age will make your benefits higher in comparison to taking the benefits earlier.
Additionally, your benefits will continue to increase each year as you wait to claim Social Security benefits at the age of 70.
Are Social Security benefits taxed after age 66? The answer is complex as illustrated in the example and explanation above as it depends on each person’s particular situation. Once you reach the age of 70, the Social Security benefits increase will discontinue. Therefore, you should claim them, then, whether you will be taxed or not.
Steps to Take
Once you begin getting those benefits, you should consider maintaining earnings below the IRS threshold to keep from getting overly taxed. There are steps you can take to do so.
Try not to take out any money from your 401K or IRA. It is best to wait until you pass the age of 70.
Select investments that require less annual taxation, such as stocks not paying any dividends or mutual funds that are tax-managed with low distributions
Use a Roth 401K or Roth IRA to hold your retirement funds. This will prevent your earnings from being taxed as long as you maintain the account for five years or more and if you do so after age 59.5 years. If you currently have a traditional IRA account, you can convert this to a Roth IRA account.
Reduce your income by giving money to charity or to your children or other family members
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Conclusion
Whether you are at the age of retirement or not, it is best to ask “Are Social Security benefits taxed after 66” and once armed with the information discussed above, you can determine your circumstances and work out a plan to avoid more taxation.
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