For almost every U.S. taxpayer, working in the U.S., Social Security (SS) tax is deducted from their paycheck. Individuals, who have been paying Social Security taxes during their work years, qualify for social security income(SSI) during their retirement. This benefit amount varies based on the age that the U.S. individual starts receiving this benefit, i.e. whether at age 62, 65, 67, or 70.
The taxable amount of SSB (Social Security Benefits) is based on the taxpayer’s total income received. Even then, only 85% of the benefit received is subject to taxes, regardless of whether the individual resides in the U.S. or abroad. Non-resident alien (NRA) taxpayers may also qualify for Social Security benefits, if they have been working in the U.S. for a certain number of years and paying social security taxes.
Given the confusion surrounding the taxation of U.S. social security benefits, we have prepared this article on the taxation of Social Security income for resident and non-resident Americans receiving or qualifying to receive social security income during retirement.
Taxation of Social Security Income for Resident Americans
As mentioned above, the taxation of SSB depends on the taxpayer’s total income amount. This income threshold is further based on the tax filing status.
To determine how much percentage of the SSB is taxable, you will need to determine your total “combined” income (adjusted gross income + Non-taxable interest + ½ of your Social Security benefits) and tax filing status
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:
- File a federal tax return as single, head of household or widow(er) with a child and your “combined” income is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
- File a joint return, and you and your spouse have a “combined” income that is
- between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
- more than $44,000, up to 85 percent of your benefits may be taxable.
- Are married but file a separate tax return, you probably will pay taxes on your benefits.
*If SS is the only benefit source of income, then it is not subject to taxes at all.
The Social Security Administration (SSA) does not withhold taxes when sending out the benefit amount. Taxpayers may be required to make quarterly tax payments based on the benefit received. Taxpayers can refer to the Form SSA-1099, Social Security Benefit Statement received in January of the following year, for the previous year, to determine their quarterly tax payment amount.
Currently the SSA also provides the option of having the tax withheld. To avail this option, you can request the tax withheld at the time of applying for benefits. If you are already receiving benefits, you must complete IRS Form W-4V, Voluntary Withholding Request The taxpayer may either call the IRS to request the form or download it from the IRS website.
Taxpayers can choose to have either 7%, 10%, 15%, or 25% of the monthly benefit amount withheld for tax purpose.
Learn more about When To File A U.S. Income Tax Return
Taxation of Social Security Income for Non-Resident Taxpayers
Non-resident alien taxpayers may also qualify for Social Security benefits if they have worked in the U.S. for a certain number of years, and earned the required number of credits to qualify for U.S. SS benefits. They may also be eligible pursuant a U.S. Social Security Agreement with another foreign country.
Social Security taxation for expats and other non-resident aliens depends on the total amount of income earned, the retirement benefits and pension income tax rules prevailing in the person’s resident country, and any existing tax treaty between the U.S. and the individuals’ resident country.
In the case of non-resident aliens, the Social Security Administration is required to withhold a flat 30% from 85% of the SSB payment. The Social Security Administration will not withhold nonresident alien tax from your benefits if you qualify for a tax treaty benefit.
If there are no existing treaties or if the NRA’s resident country doesn’t recognize U.S. SSB as qualifying retirement benefits, an individual could also be susceptible to double taxation. It is best practice to consult a cross-border tax professional to assist with the tax compliance of both the countries and minimize the tax burden.
AG Tax LLP Can Help
If you have any tax-related queries or need assistance with tax planning or filing please contact AG Tax. Our tax professionals are highly-experienced with U.S. and Canadian tax laws and can provide you the right guidance to handle your tax situation.
Aylett Grant Tax LLP is a full service accounting firm with a dedicated team of experts, who are highly-qualified and experienced in handling situations related to U.S., Canada and other international tax laws.
We can assist with:
- Canadian Personal and corporate tax returns
- Cross Border Taxation and Business Planning
- U.S. Personal and Corporate Taxation
- Disclosure of Foreign Assets and other information filings
- Retirement planning
- Estate Planning, Inheritance tax advice
Please contact either of our offices in Canada at 604-538-8735 (Greater Vancouver), or 780-702-2732 (Edmonton and Alberta) to arrange for an appointment to discuss your tax related queries.
Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.