The U.S. government offers Social Security benefits to eligible individuals and families. Even though Social Security benefits aim to provide financial support, a portion of the Social Security income is taxable in most states.
In California, Social Security benefits are not subject to state taxes. However, these benefits may be subject to federal taxes if the recipient’s overall income exceeds a certain base amount set by the IRS. Thus, while exempt from state taxation, Social Security income in California could still be federally taxable depending on total earnings.
Is Social Security Taxable in California?
California residents are not subject to taxes at the state level on Social Security benefits. However, one would have to pay federal taxes if the overall income exceeds a certain base amount set by the IRS. So, only people with lower overall earnings can get away with no taxes on their Social Security income.
How California Treats Social Security Benefits for State Taxes
The total taxable portion of the Social Security benefits would depend on the total income of an individual. For state taxes, the following tax computation is considered.
-You must add income from all other sources, such as part-time employment, investments, stock dividends, etc.
-Then, you must deduct tax credits or tax deductions (if any) from the total value above.
-Then, you must add any non-taxable income and half the amount of the Social Security income.
The final figure would be your overall income for the financial year. If your overall income exceeds the threshold amount set by the IRS, up to 85% of your Social Security benefits will be taxed.
How California Compares to Other States in Taxing Social Security Benefits
California’s tax laws are more generous than other states to some extent. That said, the taxable income slabs are different for single and married individuals.
-Married individuals who file their taxes jointly will owe taxes if the combined income exceeds $44,940. If you are single or file a separate tax return, the tax limit will kick in at a lower amount.
-If a tax return is filed separately, you will owe state taxes if the income exceeds $34,692. In several other states, Social Security benefits for singles are taxed when the overall income exceeds $25,000.
Factors That Affect Social Security Taxation in California
1. Income Thresholds
California Social Security benefits tax is based on your income threshold. The state adopts progressive income tax criteria. The higher a person’s overall income, the more will be the taxes.
2. Filing Status
Your filing status will affect your tax liability. At the time of tax filing, are you single or married? Are you the head of the household or married but filing the returns separately?
Depending on your status, you may be subjected to higher or lower tax rates. You may also receive fewer or more tax benefits based on your filing status.
3. Other Sources of Income
If you receive income from your investments, part-time jobs, or any other source, your overall income will mostly exceed the IRS threshold, subjecting you to pay taxes on Social Security income.
How to Minimize Social Security Taxes in California
To lessen the burden of Social Security Taxes in California, here are a few things you must consider.
Delay the Social Security Benefits
Eligible individuals can start receiving Social Security benefits at the age of 62. If you have other income sources, you can delay the start day. The delayed start will allow you to stay within the lower tax bracket and ultimately pay less taxes.
Utilize Tax Credits
By leveraging tax credits, you can reduce the amount of taxes you pay. So, familiarize yourself with possible tax credits and deductions, such as payment towards charitable contributions, medical expenses, rent payments, etc.
Maximize Retirement Contribution
To reduce taxes, contribute towards tax-advantageous retirement accounts like IRAs, 403(b), or 401(k). The state laws allow you to deduct the contributed amount from the total taxable income, ultimately leading to a lesser tax bill.
Sell Investments Strategically
By properly timing the sale of your investments, you can stay within an income threshold limit for a particular year. You can also minimize the tax impact on capital gains by holding on to the sale of an investment because long-term investments enjoy better tax rates than short-term investments.
Seek Professional Help
Your financial circumstances and obligations will be different from others. So, it would help to seek expert advice regarding taxes to evaluate and consider the best options for you based on your financial plans and obligations.
Federal Taxation of Social Security Benefits
The IRS has set income thresholds and other criteria to determine the taxable portion of the Social Security income. That said, the taxation rules and regulations vary from one state to another.
If your tax computation indicates that you owe taxes toward your Social Security income, you must pay them to avoid issues with the law. The IRS provides all the necessary guidelines for tax computation and tax returns.
If you are concerned about paying a large tax bill at once, you can request ‘Federal income tax withholding’ by submitting the W-4V form. The estimated amount owed towards the taxes will be withheld to help you meet your tax obligations without any issues.
Conclusion: Planning for Retirement in California
Even though California does not levy charges on Social Security benefits, all other retirement incomes are subject to taxes. In fact, California has one of the highest tax rates in the United States.
So, tax exemption of your Social Security income is only a small part of the equation because you are required to pay taxes on retirement income from other sources.
Therefore, it’s advisable to consider all the financial factors by properly evaluating other sources of retirement income, such as retirement savings accounts, pension plans, investment accounts, etc.
You must also investigate some tax-efficient withdrawal strategies to minimize the burden of tax payments. Furthermore, you must plan for healthcare costs because healthcare costs usually shoot up as we age.
If you have family responsibilities, you must factor in all the costs associated with family expenses. Moreover, you must plan the budget for travel and entertainment-related expenses.
Ultimately, your retirement plan should be realistic, flexible, and adaptable to offer you great peace of mind throughout your retirement in California.
Frequently Asked Questions(FAQ)
How much of my Social Security income is taxable?
Social Security income is taxable under certain conditions. Generally, the amount of Social Security income that is taxable depends on the total amount of income and benefits received in a given year. Up to 85% of Social Security income may be taxable for individuals with higher incomes.
Do you pay federal taxes on Social Security?
Yes, federal taxes may be due on Social Security benefits. The amount of tax due depends on the taxpayer’s total income, filing status, and other factors. Generally, those who have higher incomes may be required to pay taxes on up to 85% of their Social Security benefits.
At what age is Social Security no longer taxed?
Social Security benefits may be subject to taxation depending on the individual’s other sources of income. Generally, if an individual’s combined income is between $25,000 and $34,000, up to 50% of Social Security benefits may be subject to taxation. For those earning over $34,000, up to 85% of Social Security benefits may be subject to taxation. There is no set age at which Social Security benefits are no longer taxed.
Which state do not tax Social Security?
The states that do not tax Social Security include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. In addition, some states, such as California, New York, and Pennsylvania, provide tax exemptions for Social Security benefits. Finally, some states, such as Connecticut, Kansas, Missouri, and Montana, partially exempt Social Security benefits from taxation.