Many taxpayers who collect social security may be surprised to find that it’s not always a tax-free benefit. Depending on the amount of your other retirement income and your filing status, you could owe taxes on up to 85% of your Social Security benefits.
If you currently collect Social Security or Social Security Disability Insurance (SSDI), you will automatically receive a SSA-1099 from the government. This form only tells you the amount of your benefits, but not whether or not they are taxable. If you have been collecting social security without knowing it is taxable, you may find that you owe back taxes for the years you have been collecting payments. You may find you need additional information or guidance on how to figure out what percentage of your benefits is taxable. The following information should be helpful in getting you started in the right direction.
What is Notice 703 for Social Security?
A Notice 703 is a brief worksheet the Internal Revenue Service uses to help taxpayers determine whether their Social Security benefits are taxable in a given year. It is sent with the SSA-1099 form you should automatically receive each year.
You should also receive a copy of Form 1099-r, which is used to report the distribution of retirement benefits such as pensions, annuities or other retirement plans. Follow the IRS notice 703 instructions, and fill this form out to figure out how much you may owe the government.
How Do I Pay Taxes on Social Security?
You usually will only need to pay taxes on Social Security benefits if it is not your only source of income. If you have other substantial income coming in, such as wages, interest, self-employment, or dividends, in addition to your SS benefits, you may be taxed. If you do find that you have to pay federal income taxes on your Social Security benefits, you can make quarterly estimated payments to the IRS or opt to have federal taxes withheld from your benefits.
You are not taxed on the full amount of your benefits. Only up to 85% is taxable, based on IRS rules if:
- You file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If it’s over $34,000, your taxable benefit goes up to 85%
- You file a joint return, and you and your spouse have a combined income that is $32,000- $44,000, you many need to pay tax on 50%. If your income is over $44,000, it’s taxable up to 85%
If you are married and file a separate tax return, you probably will pay taxes on your benefits.
At the beginning of each calendar year, you will receive your Social Security Benefit Statement (Form SSA-1099). The 1099 form requirements say that you must inform the IRS about all various incomes, or face penalties. Your form will show the amount of benefits you received last year. Use this statement to complete your federal income tax return to find out if your benefits are subject to tax.
To see if you will need to pay taxes on your benefits, you can view a copy of Notice 703 here. It is an IRS social security worksheet you can fill out to determine if and how much your taxable benefit is. You’ll fill out information about any lump-sum benefit payments received in previous years; your total income including pensions, wages, interest, ordinary dividends, and capital gain distributions. Also include any tax-exempt interest, such as interest on municipal bonds. You don’t send this form into the IRS, you simply use it to calculate the information you’ll enter on form 1040.
Once you have filled out the appropriate forms, you may realize that you do, in fact, owe taxes on your Social Security benefits. And if this is the case for you, it’s very likely that you’ll be facing back-taxes. Filing taxes late is not ideal, but is better than failing to file at all. If you do owe back taxes on social security income, you’ll have to go back to the first year you received the taxable benefit and file for each of those years between then and now. You will face penalties for late payment. If you don’t file your return within the first 60 days of the tax deadline, you’ll automatically be charged $135, or 100 percent of your total tax debt, whichever is less.
If you owe back taxes, it’s important to start paying on them right away. If you can’t afford to pay the whole amount in a lump-sum, you’ll need to file for an extension, or apply for a monthly payment plan. If you owe less that $50,000 and need more time to pay, you can apply for an Online Payment Agreement with the IRS.
In this case, choose the direct debit payment plan if you’re able. This plan is the lowest-cost, hassle-free way to pay. The set-up fee is less than other plans, and you won’t face the ramifications of missed or late payments since they are automatically taken out of your account. No checks to write and mail in, no worrying about remembering to make your payment.
An Offer in Compromise is another option that lets you settle your tax debt for less than the full amount you owe. This is something to consider if you can’t pay your taxes owed in full, or if full payment would cause a major financial hardship. Not everyone qualifies for this, but it’s something to look into to see if you do.
If, after reading all of this, you are still uncertain on what to do, hire a tax professional to help. They know all the tax laws and the ins and outs of everything tax-related. Their services do come with a fee, but you may find that they more than pay for themselves with the tax savings they provide. Leave it to the experts, and rest assured that you’re in good hands.