Is My Social Security Benefit Taxable?

Did you know that your Social Security benefits could be taxable? Many Social Security recipients are surprised to learn Social Security benefits can be taxable at the FEDERAL level, depending on income level.

· If you have other sources of retirement income besides Social Security, such as an IRA; 401(k) plan, or a part-time job, you will likely owe income taxes on your Social Security benefits.

· If you rely exclusively on your Social Security checks, you probably won’t pay taxes on your benefits.

How do you figure out whether or not you owe federal income taxes on your Social Security income? Figure out your “combined income.” Combined income is your Adjusted Gross Income (AGI) plus nontaxable interest (e.g., tax exempt interest) plus 50% of your SS benefit.

If your Social Security income is taxable, the amount you pay in income tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. The current income tax brackets vary by filing status. In general,

For single filers, if your total income is:

· < $25,000: you do NOT owe tax on your Social Security benefits.

· $25,000 to $34,000: you must pay income taxes on up to 50% of SS benefits.

· > $34,000: you will pay taxes on up to 85% of your SS benefits.

For married couples filing jointly, if your total income is:

· < $32,000: you do NOT owe tax on your Social Security benefits.

· $32,000 to $44,000: you must pay income taxes on up to 50% of SS benefits.

· > $44,000: you will pay taxes on up to 85% of your SS benefits.

What about STATE income taxes? This depends on where you live. Some states collect taxes on at least some Social Security income.

· Thirty-eight states (including Massachusetts) and Washington, DC do NOT tax Social Security income.

· Minnesota and Utah follow the federal taxation rules; state income tax rates apply to your taxable benefits (up to 85% of benefits). · Ten states follow the federal rules but offer deductions or exemptions based on age or income, so you likely won’t pay tax on the full taxable amount.

Are there any strategies to reduce my tax burden in retirement? Consider a Roth IRA using where contributions are made using after-tax dollars. You do NOT pay income taxes when you withdraw your Roth IRA contributions (if over age 59.5) and do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401(k) plans which have required minimum distributions (RMDs) beginning at age 72, 73 or 75, depending on your birth year.

If you are not currently working with FPS, we would be happy to talk with you. Questions? We are here to help.

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Best regards,

Janet Rhodes Friedman, CFP®, CDFA®, MBA

Janet@PlanWithFPS.com

617-630-4978

Financial Planning Solutions, LLC (FPS) is a Registered Investment Advisor. Financial Planning Solutions, LLC (FPS) provides this blog for informational and educational purposes only. Nothing in this blog should be considered investment, tax, or legal advice. FPS only renders personalized advice to each client. Information herein includes opinions and source information that is believed to be reliable. However, such information may not be independently verified by FPS. Please see important disclosures link at the bottom of this page