Does california tax social security retirement benefits

That's not how it works.

Suppose you received $12,000 in SS benefits, and that because of other income, 85% of your benefits were taxed ($10,200).

When the federal numbers come over to CA, CA starts with the federal Adjusted Gross Income (AGI) on line 13 of form CA 540. In that AGI number, the $1,800 that is not taxed on the federal is not present - so the $1,800 is not taxed in CA.

And as Isabella pointed out, on line 14, the $10,200 will appear as a subtraction, to subtract out the taxable portion of the SS benefits on the federal return.

So the $1,800 is not taxed in CA and the $10,200 is not taxed in CA, and together these add up to the original $12,000. California does not tax SS benefits.

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Will your tax bill this year include taxes on your Social Security benefits? About 55 million people receive monthly Social Security payments, and some of them pay taxes on up to 85 percent of those benefits, depending on their financial situation.

Will you have to ante up to Uncle Sam when you begin to collect Social Security? If you’re not certain—or if you’re currently being taxed on your benefits—the California Society of CPAs (CalCPA.org) offers advice on ways to minimize your outlay.

Determine When to Take Payments

Before even thinking about taxes, to make the most of your benefit, the first step is to figure out the best time to start collecting it. While 65 was once the universal age when people left work, and began collecting Social Security and other pension benefits, that is no longer the case. Today, the Social Security “full retirement age” for those born in 1937 or earlier is 65, but it rises gradually for those born in later years and tops out at 67 for anyone born after 1959.

If you qualify for benefits and are planning when to begin taking them, be aware that the longer you wait the higher the monthly payment you will receive. You can start your benefits as early as 62, but the amount you receive will be less than what you would get at full retirement age. If you hold out until age 70, however, you will get a yearly percentage increase to your benefits calculated based on the year you were born.

When you reach age 70, your benefits no longer continue to increase even if you continue to delay taking them. Since the average lifespan keeps lengthening, you may want to consider delaying your benefits so that you receive the highest amount when you need it. Your decision will, of course, be affected by numerous factors that include your financial situation and your health. Your CPA can help you determine what’s best for you.

Know How and When Social Security Is Taxed

If your benefits are your sole income, it’s unlikely you will owe taxes on them. If you receive any other income or take distributions from some retirement plans, however, you may have to pay taxes on your Social Security benefits.

There’s a relatively simple calculation to find out if your benefits are taxable. Begin by taking the total benefit you receive each year and dividing it in half. For example, say you receive $14,400 annually in Social Security benefits. One-half would be $7,200. Add that amount plus any nontaxable interest, such as interest from certain state or municipal bonds, to your adjusted gross income. Now compare it to what is called your “base amount.”

The current base amount is $25,000 for those who are single, head of household or a qualifying widow or widower, and $32,000 for married people filing jointly. Income above that base amount may be taxable.

Adopt Smart Strategies

One strategy to minimize or eliminate the taxes you might pay on your Social Security benefits is to try to rely on a mix of taxable and nontaxable income. The distribution you take from a traditional IRA will be taxable, for example, and thus included in the income you compare against your base amount.

On the other hand, a qualified distribution from a Roth IRA is tax free, as is a withdrawal from a non-retirement savings account.  With that in mind, you may want to build a retirement portfolio that includes some nontaxable income. 

Your CPA Can Help

Your Social Security income, and the taxes you may pay on it, is one consideration in your overall retirement plan. Your local CPA can help you create a retirement savings program aimed at producing the most available income in retirement and minimizing your tax bite. Be sure to turn to him or her with all your financial questions.

Copyright 2014 American Institute of Certified Public Accountants.

The Money Management columns are a joint effort of the AICPA and the California Society of CPAs as part of the profession’s nationwide 360 Degrees of Financial Literacy program.

To listen to podcasts with more financial tips, go to http://tinyurl.com/calcpafinem.

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