Why Do I Owe Taxes? I Am On Social Security

Dear Lynnette, I was very upset yesterday to learn that my husband and I owe taxes ($1,100) for 2022. I am on Social Security and my husband is a supervisor at a motel here in Wyoming. I work part time and claimed zero as did my husband. I had an extra $25 taken out of my paychecks (twice a month). He made $55,000 and I had $13,000 from social security and $20,000 for my part time work. I am 67 years old. How is this possible? 

Answer: Sorry to hear that you owe taxes to the IRS. Let me preface my answer by telling you: I’m not a CPA or accountant. You should always seek professional tax advice for matters like this.

However, I may be able to offer some educational insights into why you might owe taxes this year and have to write a check to Uncle Sam.

First, a number of tax deductions and credits have gone away. See this NPR article in which I was quoted that details the elimination of these tax breaks.

Additionally, you and your husband’s combined earned income puts you in the 22% tax bracket.

You did not state how much in taxes were taken out. Nor did you indicate whether you itemized or took the standard deduction.

Both of those factors matter when it comes to figuring out why you now have a $1,100 tax liability.

But let’s assume you took the standard deduction, which was $25,900 for joint filers in 2022.

I’m also assuming that you have no other earned income sources and that you didn’t get money elsewhere from something like pension income or an Individual Retirement Account withdrawal, bank account interest, stock dividends or rental property income.

Now let’s address your Social Security income.

Under federal law, if you’re married filing a joint tax return, and you and your spouse’s combined income was over $32,000 in 2022, then you have to pay taxes on 85% of your Social Security income.

Since you received $20,000 in SS income, you owe taxes on $17,000 of it.

So let’s add everything up:

• • $55,000 in income from your husband’s job

• • $20,000 in income from your part-time job

• $17,000 in income from your Social Security benefits

Your total gross income is $92,000.

Your adjusted gross income could be lower, depending on whether you qualified for other tax deductions or credits. Again, I don’t have this information, so I’m going to use a worst case scenario and assume that your adjusted gross income is also $92,000.

Your AGI isn’t the number on which you’re taxed.

Your taxable income is calculated AFTER you take into account your standard or itemized deduction.

Again, let’s say you took the $25,900 standard deduction.

$92,000 – $25,900 equals $66,100.

Now we’re closer to what’s called your modified adjusted gross income.

According to the IRS: here’s what you can expect to pay as joint filers, based on your earnings:

Income > $41,775 but not over $89,075 $4,807.50 plus 22% of the excess > $41,775

Under this scenario, your “excess” over $41,775 is $24,325; and 22% of $24,325 is $5,351.50

Summary

Your federal tax liability should likely be around $10,159 (which is $4,807.50 plus $5,351.50).

Check your W-2 forms and see how much you both paid in federal taxes.

If the numbers are way off, again, I’d recommend getting help.

If you need help with your taxes, VITA can help. VITA offers free tax preparation services for those who qualify and its Tax-Aide program helps seniors and low-income individuals get their taxes done for free. Additionally, VITA’s MyFreeTaxes.com website provides free federal and state filing services to anyone with an adjusted gross income of $66,000 or less.

Continue reading for an explanation of the tax terms used in this article.

What’s the difference between a tax deduction and a tax credit?

Many people are confused between the differences between tax deductions and tax credits. Both can help reduce your taxable income, but they do it in different ways.

Tax deductions reduce the amount of taxable income you report on your tax return, while tax credits are applied directly to your taxes due, reducing the total amount of taxes you owe.

For example, if you’re in the 22% tax bracket and claim a $2,000 deduction on your taxes, that would reduce your taxable income by $2,000, which would save you $440 in taxes (22% of $2,000).

On the other hand, a tax credit is applied directly to your taxes due. So if you owe $2,000 in taxes and you claim a $2,000 tax credit, that would reduce your taxes due by the full amount of the credit — in this case, completely eliminating your liability!

Some tax credits are also refundable, meaning a $2,000 refundable tax credit could give you a $2,000 tax refund check, putting money directly into your bank account. Learn more about how credits and deductions work from the IRS.

What is a tax bracket ?

A tax bracket is the rate at which a person’s income is taxed. The U.S. has seven federal income tax brackets, ranging from 10% to 37%, depending on your taxable income level and filing status.

What does itemized vs standard deduction mean?

The standard deduction is a fixed dollar amount that reduces your taxable income. Everyone is eligible for the standard deduction, and it is based on your filing status. The amount of the deduction varies from year to year, but in 2022 it was $12,950 for single taxpayers or married taxpayers filing separately, $19,400 for heads of household and $25,900 for married couples filing jointly.

Itemized deductions are deductions for specific expenses that you can claim if they exceed the amount of your standard deduction. Common itemized deductions include state and local taxes, mortgage interest, charitable contributions and medical expenses.

If your itemized deductions are higher than the standard deduction, you may want to itemize your deductions instead of taking the standard deduction. Itemizing your deductions requires more paperwork, but it can allow you to benefit from larger tax savings if you’re eligible for several types of deductions.

What is an Individual Retirement Account (IRA)?

An Individual Retirement Account (IRA) is an investment vehicle that allows you to save for retirement by investing pre-tax income in stocks, bonds, mutual funds and other investments.

For the tax years 2019, 2020, 2021 and 2022, you could contribute up to $6,000 per year ($7,000 if you’re age 50 or over) to a traditional IRA, and your contributions are generally tax deductible. 

For the 2023 tax year, the annual IRA contribution limit got bumped up to $6,500, and $7,500 if age 50 and older.

What is your adjusted gross income (AGI)?

Your adjusted gross income (AGI) is your total taxable income minus any adjustments or deductions you’re eligible for. It’s the amount of income that’s used to calculate your federal tax liability. Your AGI can be found on line 8b of Form 1040.

What is the difference between adjusted gross income and modified adjusted gross income?

Your adjusted gross income (AGI) is your total taxable income minus any adjustments or deductions you’re eligible for. Modified gross income (MAGI) is similar to AGI, but it takes into account additional items such as certain types of Social Security benefits and adoption assistance payments that don’t count towards your AGI.

What does your federal tax liability mean?

Your federal tax liability is the amount of income tax you owe to the IRS. It’s calculated based on your taxable income, filing status and any deductions or credits you’re eligible for. Your federal tax liability is reported on line 16 of Form 1040.