Social Security benefits are an important part of retirement income. For some retirees, these benefits make up most or all of their support. In this situation, benefits are not taxable. When you have additional income from work, interest earnings, investments or taxable benefits such as withdrawals from a 401(k) plan, some of your Social Security benefits may be taxable.
The Internal Revenue Service says you can figure out whether you have to pay taxes on Social Security by adding half of your annual benefit to your other income. If the total is more than $32,000 and you file a joint return, some of your benefits must be reported as taxable income on your tax return. For single filers the threshold is $25,000. For example, if you file as single and your annual benefit is $15,000, half of your benefit amount is $7,500. You you can earn up to $17,500 in additional income before you hit the $25,000 mark and have to pay taxes on Social Security benefits.
When Social Security is taxable at all, you have to pay taxes on at least 50 percent of your benefits. As your income increases the percentage can reach a maximum of 85 percent of your annual benefit amount. This maximum percentage applies when your income reaches $34,000 if you file as single. For married couples filing a joint return, the maximum rate kicks in when income reaches $44,000.
Adjusted Gross Income
When you calculate your income to decide if you have to pay taxes on Social Security, you use a modified adjusted gross income figure. Earnings from work, self-employment and capital gains are included. You also count tax-exempt interest and interest on qualified U.S. savings bonds. Include foreign earnings, including housing payments and income earned as a resident of American Samoa or Puerto Rico.
The amount of money you earn can affect your benefits in another way besides having to pay taxes on them. You can start receiving benefits as early as age 62. However, if you earn more than an annual amount set by the Social Security Administration, your benefit amount is lowered by one dollar for every two dollars you make over the annual limit. As of 2012 this earnings limit was $14,640. This benefit reduction rule applies only until you reach full retirement age. After that, your earnings do not reduce the amount of your retirement benefits.