Will I Have A Tax Bill Next April?
Q: My wife and I did not pay any tax for 2021. Our only income was $30,900 in Social Security and a $10,000 certificate of deposit which was earning next to zero interest. In 2022, we expect to receive $32,723 in Social Security and $18,000 from an IRA. Will we owe any taxes?
A: Taxation rules for retirement income varies, depending on the type of income that you receive. But regardless of the source, IRS rules say taxes that you owe must be paid as you receive income during the year, either through withholding or estimated tax payments.
When your only source of retirement income is Social Security, you probably won’t pay any federal income taxes on that income. But up to 85% of Social Security income may become taxable if you have income from other sources, such as savings from a traditional IRA or 401(k), pension, job, or other sources.
Will your income fall within the taxable range? It appears to. The IRS has a worksheet that you can fill in to figure out if your Social Security benefits will be taxable.
To calculate this, multiply your Social Security benefits by 50% or (0.50), $32,723
Add your total taxable income from other sources retirement account + $18,000.00
Add any tax-exempt interest +$0.00
Your combined income is $34,361.50
If the sum exceeds $32,000 for married couples filing jointly, or $25,000 for single filers, then a portion of your Social Security benefits will be taxable. You can calculate the taxable portion using the worksheet found in the instructions for the federal 1040 returns. (In the 2021 edition it is found on page 31.)
One way to avoid a tax bill in April is to consider having taxes withheld from your Social Security benefits and from your retirement account distributions. The easiest way to set up withholdings from Social Security benefits is to set up a “my Social Security” (https://www.ssa.gov/myaccount/) account if you haven’t done so already.
If you haven’t done that yet and think you may owe taxes, you still have time to send in an estimated tax payment as long as you do so by January 15, 2023. To learn about estimated payments get IRS publication 505 (2022) Tax Withholding and Estimated Payments
How are your taxes affected in 2022? Please let us know by taking TSCL’s new 2022 Retirement Survey. And thanks for your help!