Social Security federal tax withholding, Digi Mart USA News: Social Security benefits may be taxable, but federal income tax is not automatically withheld from benefit checks. New claimants may not realize this until they receive an unexpected tax bill.
One retiree recently warned others about exactly that in a Reddit post. In a Reddit thread about the Social Security application process, one user offered a piece of advice: “Don’t forget to take federal tax out!
I set mine for 10%.”
The commenter explained that income from sources such as traditional IRAs, 401(k) accounts and capital gains can affect whether Social Security benefits are taxable. Not all states tax Social Security income, but federal income tax may apply to your benefits.
“People assume Social Security works like their old paycheck did – taxes just come out, done. It doesn’t work that way,” said Leandre Boone, founder of Buckeye Financial.
According to the Social Security Administration (SSA), up to 85% of your benefits are taxable if you file a return as an individual and your combined income exceeds $25,000, or if you file a joint return and you and your spouse have a combined income of more than $32,000. That means up to 85% of benefits is included in taxable income, not an 85% tax rate.
“We do have to explain to some clients how it’s not 85% tax rate, but rather 85% of their Social Security income included in their taxable income and then taxed at their marginal income tax rate,” said Caleb Moyer, owner of Moyer Tax Services, an Omaha, Nebraska-based tax preparation firm.
When you do not withhold enough, one of two things can happen. “A big check written at tax time, or an underpayment penalty stacked on top.
Neither is fun,” Boone explained.
Moyer also tells clients that withholding does not have to come from Social Security itself. For example, someone receiving Social Security along with a pension or retirement account distributions may choose to have more taxes withheld from those sources instead.
This can provide more flexibility, since Social Security allows federal withholding only at set rates of 7%, 10%, 12% or 22%, Moyer explained. As a result, someone could have no federal tax withheld from Social Security yet still have enough withheld elsewhere to cover the overall tax liability.
The important thing is to make sure enough is paid throughout the year. “If your income puts your benefits in taxable territory and you skip setting up withholding, you’re racking up a tax bill all year without knowing it,” Boone noted.
“Then April hits and it’s a gut punch.”
If you prefer to withhold directly from your benefits, Boone said you can do so by filing Form W-4V, Voluntary Withholding Request, with the SSA. “You pick a percentage: 7, 10, 12 or 22.
It comes out of your benefit gradually instead of hitting all at once,” he explained. Withholding can also be handled through quarterly estimated payments.
“Either route, the real move is doing the math before the benefits start – not guessing, actually figuring out how much of your income will be taxable and picking a number that covers it,” Boone advised.
As Moyer mentioned, you can also choose to have more withheld from other income sources. “Ultimately, the goal is to pay in enough throughout the year to avoid ‘tipping’ the government by having to pay more in taxes because of interest or penalties,” Moyer said.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
