While various think tanks, economists and policy wonks contemplate the big "fix" for Social Security, Congress has quietly fixed a small part of the system: Social Security recipients can now elect to have income taxes withheld from their monthly checks.
Although letting Uncle Sam have first crack at your checks might sound crazy, it can be a plus if withholding lets you avoid the hassle of making quarterly estimated tax payments, or if it saves you from paying a sizable tax bill, and possibly penalties, when you file your 1040.To avoid penalties, estimated payments are generally required if you'll owe $1,000 or more when you file your return. Exceptions let you dodge the penalty if withholding covers at least 90 percent of your tax bill for the year or 100 percent of your previous year's liability. (For filers whose adjusted gross income exceeds $150,000 in 1999, make that 105 percent of the previous year's tax bill.)
To request withholding, file an IRS Form W-4V with your local Social Security Administration office (www.ssa.gov). The form requires you to choose a withholding rate of 7 percent, 15 percent, 28 percent or 31 percent; choosing a flat dollar amount is not an option. If you know how much you want withheld, you have to do the math to figure which withholding rate to request.
You can choose a rate that will cover just the tax on your benefits or a higher rate if you want to use withholding to wipe out the need to make quarterly payments on other taxable income, such as investment income. At the end of the year, you will receive an SSA-1099 form showing the amount of income tax withheld.
Social Security benefits are taxable if your "provisional income" (basically, your adjusted gross income plus any tax-exempt interest plus 50 percent of your Social Security benefits) exceeds $25,000 for a single person or $32,000 for a couple filing jointly.
Up to 85 percent of your benefits can be taxed, but don't fall into the bad habit of overwithholding. Carefully estimate your tax bill for 1999 and choose a withholding rate that will bring you within a few hundred dollars of it -- preferably on the low side.