After years of having income taxes withheld from your pay, it may come as a shock to learn that your retirement benefits can be taxed, too. It all depends on how your retirement plan was financed. If your employer put money into a pension and didn't report it as income for you, you'll owe taxes. The same is true if you funded a 401(k) or individual retirement account with contributions that you deducted from your tax.
A Form 1099-R will tell you how much of a retirement plan is taxable. An employer or fund manager who controls the pension fund, 401(k) or IRA will send you a form at the end of each tax year showing how much you got from that program, how much was taxable and how much income tax was withheld before you got the check, if any. Annuities are a special form of retirement income, but fall under the same general tax rules as other programs.
Once you add up how much you got from all your retirement programs, you can figure out how much, if any, of your Social Security benefits are taxable. Add half your benefits reported by the Social Security Administration on Form SSA-1099 to the total of your other income, from all sources including retirement plans to get a provisional income. Check your filing status. For married couples filing jointly, if it's under $32,000, none of your Social Security is taxable.
If your income is between $32,000 and $44,000, you may have to pay on 50 percent of your Social Security. Above $44,000, it will be 85 percent. To figure how much as of your 2011 tax return, divide the amount between $32,000 and $44,000 by two and multiply any amount over $44,000 by .085. Add those two sums. Multiply your Social Security benefits by .085. Enter the lesser of the two sums as the amount of Social Security that is taxable.
Any pension or retirement benefits received before age 59 1/2 will be subject to a 10 percent tax penalty. There are exceptions, such as for disabilities, a first-time home purchase, some educational expenses or "substantially equal periodic payments" from a retirement plan after you leave that service or employer. Any equal payments from funds not taxed when they were contributed will be subject to taxes, but the lump sum value of the plan won't be.
If you don't have a pension, annuity or some other retirement plan and Social Security is your only benefit, none of that money is taxable. You don't even have to file a tax return in that case.
- Social Security: Retirement Benefits
- IRS: Pensions and Annuities
- Free Advice: Are Pension Benefits Taxable?
- GooGo Bits.com: Income Taxes on Retirement Plans, Pensions and Annuities
- Greenstein, Rogoff, Olsen & Co. CPAs: How to Determine if Your Social Security Benefits Are Taxable
- Tax.com: Tax Guide for the Retiree
- Form 1040 Tax Forms image by Viola Joyner from Fotolia.com