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TAX TIPS TUESDAY – Social Security Questions

By Rosalyn Partin, H&R Block

  1. Whether or not Social Security benefits will be reduced due to income
  2. Whether or not Social Security benefits are subject to income tax.

We field lots of questions throughout the year about the taxability of Social Security benefits. Many Social Security recipients confuse two issues:

If you are receiving Social Security benefits and you have not reached the “full retirement age” (which is based on the year you were born), your monthly Social Security retirement benefits can be reduced due to your earned income. Earned Income is income you receive for work you perform. It includes wages, self-employed business net income, and farming net income. Earned Income does not include investment income, rental income, or income you receive because you are retired such as pensions. Each year, the Social Security Administration sets the amount of earned income allowed while receiving full Social Security benefits. In 2021, if you’re under full retirement age, the annual earnings limit is $18,960.

Social Security benefits may be subject to federal income tax depending on your filing status and total income. The calculation takes ½ of the total Social Security benefits shown on the return added to your total other income from all sources. If the sum is over $32,000 for married taxpayers or over $25,000 for single taxpayers, a portion of the Social Security benefits will be subject to income tax. Currently, no more than 85% of Social Security benefits received can be subject to income tax.

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Besides these two issues, there are other important points for people receiving Social Security benefits:

  1. The amount you pay for Medicare Part B is related to your total income. Currently, single taxpayers or married taxpayers filing separate from their spouse pay a higher Medicare B premium if their income is over $88,000. Married taxpayers filing jointly will pay an increased amount for Medicare B when their income is over $176,000. Taxpayers who anticipate having a tax event that may cause their income for one year to be inflated and go over the limit may be able to reduce the impact of the event on their Medicare cost by seeking advice from a professional.
  2. If you receive Social Security retirement or disability benefits or you receive Supplemental Security Income (SSI) and you aren’t required to file an income tax return, you may want to file a return for 2020 and 2021 if you have dependent children. By filing a return even though you aren’t required to file, you will be eligible for the Economic Impact Payments (stimulus payments) for your dependent children and the Child Tax Credit for 2021.

If you have questions about Social Security benefits and would like help from the Tax Professionals at H&R Block, please call your local H&R Block office. In Manchester TN call 931-728-9462. H&R Block Has Your Back!

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