This trap can send social security to IRS. Retirees rely on Social Security to help them make ends meet. Given that they already paid payroll taxes in order to earn their benefits, retirees often find it shocking when they discover that under certain circumstances, Social Security payments can be subject to income tax. One of the most common reasons why retirees end up having to pay income tax on a portion of their benefits involves how they handle their tax favored retirement accounts, such as IRA’s and 401(k) plans from former employers. Depending on what you do with IRAs and 401(k)s, as situation that would otherwise leave your Social Security benefits completely untaxed could turn into a costly alternative that requires substantially higher tax payments to the IRS.
This trap can send social security to IRS is a real threat to retirees in this situation. The laws governing taxation of social security benefits acknowledge the fact that most retirees live on fixed incomes and can’t afford to lose a big portion of their benefits to taxes. That’s why they use an income based test in order to come up with how muh ocf a person’t benefits must get included in taxable income.
Calculating exactly how much money you have to include as taxable income is a bit complicated. To start out, retirees take their total income from all sources other than Social Security and add it up. Then they have to put in one half of their total social security income for the year. That comes up with an annual income number for purposes of determining whether any benefits will be taxes.
Most people don’t end up paying tax on any of their Social Security, and the reason is pretty simple: They don’t have outside income that can push them over the thresholds. If your only source of income is Social Security, then because of the way the formula works, there’s just about no way to get enough in benefits to make any of them taxable. Spending down savings in regular taxable accounts has little impact because those savings don’t produce taxable income. However, withdrawals from retirement accounts like IRA’s and 401(k)s present a big challenge. For traditional IRAs and 401(k)s, those withdrawals are treated as income for tax purposes: meaning that retirees typically have to pay taxes on what they take out of their retirement accounts.