Social Security benefits & taxes

Are Social Security Benefits Taxable?

We work with a lot of clients nearing retirement, so we get a lot of questions about Social Security. Social Security can be an important piece of your retirement income plan, so it is very important to understand how it works, and how to maximize your benefits.

One question that many people ask is whether or not they will have to pay taxes on their Social Security benefits. As with anything tax-related in our country, the answer is not a simple one.

First of all, while most people may have to pay income taxes on their Social Security benefits, a few may not. Those that do will have to pay taxes on a certain percentage of their benefits, but the percentage can vary.

In the interest of making this as simple as possible to understand, here are a few bullet points to keep in mind when figuring out whether or not your benefits are taxable under current IRS rules:*

  • If Social Security benefits are your only source of income, you most likely will not have to file or pay taxes for that tax year.
  • If you have another source of taxable income, your tax payments will depend on a couple of different things, including filing status, and total other income. Depending on these factors, up to 85% of your Social Security benefits may be subject to taxation, per the rules below:
    • If you file as a single individual, with a total combined income (defined as your adjusted gross income, plus tax-exempt interest, plus 1/2 of your Social Security benefits) between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefits. If your combined income is over $34,000, you may owe taxes on up to 85% of your benefit.
    • If you are married, filing jointly, and you and your spouse have a total combined income between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your combined income exceeds $44,000, you may owe taxes on up to 85% of your benefits.
    • If you are married, filing separately, you may owe taxes on up to 85% of your benefit.

Clear as mud?

Basically, if you have sources of income other than Social Security (which hopefully you do if you planned well for retirement), you should plan on having to pay income taxes on at least some portion of your Social Security benefits.

If you have questions about Social Security, or want to learn how you can maximize your benefits during your retirement years, please contact us for a free Social Security strategy session!

 

*  Current IRS rules as of 2016. Please note that we are not tax attorneys, nor do we provide tax advice. Before making any tax decisions, you should always consult with an accountant or qualified tax attorney.

 

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