Is my social security taxable? How much will I pay? Is there anything I can do? These are very common questions when thinking about your retirement income plan. It’s important to understand how much you’ll pay in taxes when you retire. Let’s look at two questions:
How much of my social security is taxable?
How can I reduce these taxes?
How much of my Social Security taxable?
Social security is generally taxed as income on your federal tax return. How much you’ll pay is based on your total Combined Income:
If married and file jointly, you’ll pay:
- Up to 50% if combined income is between $32,000-$44,000
- Up to 85% if combine income is more than $44,000
If filing individually, you’ll pay:
- Up to 50% if combined income is between $25,000-$34,000
- Up to 85% if combine income is more than $34,000
To find your “Combined Income”, use the following formula:
- Adjusted Gross Income
- + Nontaxable interest
- + 50% of your Social Security benefits
- = Combined income
Let’s look at the following example, assuming you’re a couple filing a joint tax return:
- $30,000 in income from part-time work
- $28,000 in Social Security benefits
- Your Gross Income is $58,000
- Your “Combined Income” is:
- $30,000 income from part-time work
- + $14,000 (50% of your Social Security benefits)
- = $44,000 combined income
- Your Combined Income falls in the $32,000–$44,000 range, so 50% of the difference between the income and the threshold is taxable.
Here’s how you would calculate your taxable amount:
- $44,000 combined income
- – 32,000 threshold
- = $12,000 over the threshold
- x 50%, the taxable percentage of your benefits
- = $6,000 taxable benefits
If you want to calculate yours more precisely, consider using the IRS Social Security worksheet.
Does my state tax my Social Security?
This depends on where you live. 38 of the 50 states will not tax your benefits. If you live in Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia, you may pay tax on some or all of your benefits. Check with your local tax professional to see how this might affect you.
How can I reduce these taxes?
If your income is far above the $44,000 joint or $34,000 individual threshold, you’re unlikely to reduce these taxes much, if at all. However, if you’re close, here are two options that could help reduce taxes on your social security benefits:
- Increase Roth IRA distributions. Roth distributions are tax-free and do not add to your Combined Income.
- Make a Qualified Charitable Distribution from your IRA. When you turn 72, you’re required to start taking distributions from your IRA. If you don’t need them, a Qualified Charitable Distribution satisfies this requirement but doesn’t add to your taxable income. This is one of six strategies we cover in I’m 72 and Don’t Need My RMDs…What Should I Do?.
Interested in more ways to understand and reduce your taxes? Check out our free Tax & Strategy Guide for tips on income and estate tax strategies you can use!
Sources – SSA.gov
Josh Whelan
CFP®, CLU®, ChFC®
Partner, Financial Advisor
About the Author
Josh sees his profession as a calling, not just a career. His motive for pursing financial planning was very personal. While working on a degree in marriage and family counseling, Josh’s father was diagnosed with multiple sclerosis. Josh decided then and there to change career paths to help his family prepare for an uncertain financial future. Financial planning became his path to serving others.
The “Alterra” name was coined by joining the Latin roots “alter”, the origin of the word “altruism” with “terra” meaning earth or land. This name reflects the company philosophy of “clients before profits” and providing firmly grounded advice.