Social Security Benefits: The Taxman Cometh

The government gives--and the government takes away.

Social Security retirement benefits are a key source of income for many retirees. But depending on how much other income they have, seniors could find themselves returning part of their monthly benefits to the IRS.

To estimate whether you might owe taxes on your benefits, add together your adjusted gross income, tax-exempt interest and one-half of your Social Security benefits to get "provisional income." Under current tax law, if you're married and your joint provisional income is less than $32,000, your Social Security benefits won't be taxed. But if your joint income is between $32,000 and $44,000, 50% of your benefits could be taxable. If your income is above $44,000, 85% of your benefits may be taxable. For single filers, the comparable thresholds are $25,000 and $34,000. For more information, see IRS Publication 915.

Keep in mind that we're talking about 50% or 85% of your benefits being taxable, not a 50% or 85% tax rate. The tax rate applied to the taxable portion of your Social Security benefits would reflect your usual federal tax rate, which might be 15% or 25%.

Still, the tax can come as a nasty surprise--and it can hit retirees who don't consider themselves especially well-off. Let's say you retire with a mortgage and you have to make large traditional Individual Retirement Account withdrawals to cover your monthly mortgage payments. Those IRA withdrawals would not only be taxable, but they may also trigger taxes on your Social Security benefits.

Does it turn out you'll likely have to pay taxes on your Social Security? If you aren't collecting your benefits yet, consider asking Social Security to withhold federal taxes when you apply. If you're already receiving Social Security, go to www.ssa.gov and download Form W-4V, Voluntary Withholding Request. The form will give you a choice of withholding 7%, 10%, 15% or 25% of your monthly benefits. Sign the form and mail it to your local Social Security office, which you can also find listed on the website.

For more from Jonathan Clements, click here.

Citigroup Inc. and its affiliates do not provide tax or legal advice. To the extent that this material or any attachment concerns tax matters, it is not intended to be used and cannot be used by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Any such taxpayer should seek advice based on the taxpayer's particular circumstances from an independent tax advisor.

© 2012 Citigroup Inc. Citi Personal Wealth Management is a business of Citigroup Inc., which offers investment products through Citigroup Global Markets Inc. ("CGMI"), member SIPC. CGMI and Citibank, N.A. are affiliated companies under the common control of Citigroup Inc. Citi and Citi with Arc Design are registered service marks of Citigroup Inc. or its affiliates