Are social security benefits taxable after age 66

If you earn enough money for your benefits to be taxable, you could end up paying the highest income taxes in the country.

Social Security benefits are tax free unless you earn too much income during the year. To know whether you might be subject to such taxes you have to figure your "combined income." This is actually quite easy: Simply add one-half of the total Social Security you received during the year to all your other income, including any tax-exempt interest (for example, interest you earned from tax-exempt bonds).

You'll have to pay tax on part of your benefits if your combined income exceeds these thresholds:

• $32,000 if you're married and file a joint tax return (as most couples do), or
• $25,000 if you're single.

If a married couple files their taxes separately, the threshold is reduced to zero—they always have to pay taxes on their benefits. The only exception is if they did not live together at any time during the year; in this event the $25,000 threshold applies.

This applies to all types of Social Security benefits: disability, retirement, dependents, and survivors benefits.

How much of your Social Security benefits will be taxed depends on just how high your combined income is.

Individual filers. If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you have to pay income tax on up to 50% of your Social Security benefits. If your income is above $34,000, up to 85% of your Social Security benefits is subject to income tax.

Joint filers. If you file a joint return, you have to pay taxes on up to 50% of your benefits if you and your spouse have a combined income between $32,000 and $44,000. If your income is more than $44,000, up to 85% of your Social Security benefits is subject to income tax.

Example: Betty and Bruno are a retired married couple who file jointly and both work at part-time jobs. Betty earned $12,000 from her job and Bruno earned $18,000 from his. They also had $10,000 in investment income, including $5,000 in interest from tax-exempt municipal bonds. They received $20,000 in Social Security benefits during the year. Their combined income is $50,000 ($30,000 in wages + $10,000 investment income + (50% x $20,000 Social Security benefits) = $50,000.) Because this is more than the $44,000 ceiling, they must pay income tax on 85% of their Social Security benefits. Of course, they must also pay tax on the income from their part-time jobs.

If you earn enough money for your benefits to be taxable, you could end up paying the highest income taxes in the country. Here's why: Every dollar you earn over the 85% threshold amount will result in 85 cents of your benefits being taxed, plus you'll have to pay tax on the extra income. So for every dollar you earn over the 85% threshold, you'll end up paying tax on $1.85. If you're in the 22% bracket, this works out to a 40% tax rate (22% x 1.85 = .407).

Calculating the exact amount of tax that must be paid on Social Security benefits can be quite complicated. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, contains detailed instructions and a worksheet you can use.

If you plan to work after the normal retirement age, you should consider putting off claiming your Social Security benefits. If you wait until after your full retirement age to claim Social Security retirement benefits, your benefit amounts will be permanently higher. Your benefit amount is increased by a certain percentage each year you wait up to age 70. After age 70, there is no longer any increase, so you should claim your benefits then even if they will be partly subject to income tax.

Once you start receiving Social Security benefits, to keep your income below the applicable threshold, or at least as low as possible, you should:

• put off taking money out of retirement accounts like traditional IRAs, and 401(k)s. You don't have to take any money out until you reach age 70.5.
• choose investments that don't generate a lot of taxable income during the year—for example, stocks that don't pay dividends, or tax-managed mutual funds that have low or no taxable distributions.
• put your retirement money in Roth IRAs and Roth 401(k)s. Your earnings are not subject to any tax if you hold the account at least five years and are over 59.5 years old. If you have a traditional IRA, you can convert it into a Roth IRA.
• consider reducing your income by giving income-producing assets to your children or other relatives, or to charities.

The tax laws encourage retired people to "live in sin"—that is, without benefit of marriage. A couple increases the amount of income they can earn without being taxed on their Social Security benefits if they aren't married and file their taxes separately. Each will be entitled to earn $25,000 in combined income without paying tax on their benefits, for a total of $50,000 of income without extra taxes. In contrast, a married couple can earn no more than $34,000 in combined income without paying extra taxes. However, a married couple can get the same treatment as singles if they live apart part of the year and file their taxes separately.

For more information on Social Security, refer to Social Security, Medicare & Government Pensions: Get the Most Out of Your Retirement & Medical Benefits, by Joseph L. Matthews and Dorothy Matthews Berman (Nolo).

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