Social Security and Taxes

Social Security and Taxes

SCOTT NEWHOUSE IS A FINANCIAL PLANNER SERVING RETIREES IN SCOTTSDALE, AZ, HENDERSON, NV AND THOUSAND OAKS, CA. HIS GOAL IS TO MAKE SURE HIS CLIENTS CAN RETIRE COMFORTABLY WITHOUT HAVING TO SACRIFICE THEIR LIFESTYLE IN RETIREMENT.

To the surprise of a number of people that I’ve worked with and talked to, yes, there is a chance that your Social Security Benefits will be taxed.  Currently, about 40% of people who get benefits pay income taxes on them.

I know what you may be thinking: I’ve paid Social Security Taxes all throughout my earning years, and now you’re telling me that I could be taxed on it again?  Yup, that’s exactly what I’m saying.  It’s kind of like a double taxation.  

How Much is Social Security Taxed?

The amount you can be taxed on your benefits ranges from 0% all the way to 85% of your benefits and depends upon your income. But not just your ordinary income, or adjusted gross income.  Because taxes aren’t confusing enough, the IRS created something called provisional income in order for you to determine whether your social security benefits will be taxed.

How to Calculate Provisional Income

Start off with ADI Adjusted Gross Income (line 11 on 1040), then add back in certain deductions, things like IRA contributions, payments on student loan interest, rental losses, and more. 

Provisional Income is calculated by combining: 

-Your Modified Adjusted Gross Income 

+ Nontaxable interest income (like a muni bond)

+ Half of your Social Security benefits

= Provisional Income

Once you have your Provisional Income calculated, then you need to see whether that amount will cause you to pay taxes on your benefits: 

  • If your income is between $25,000 and $34,000 as an individual, or $32,000 and $44,000 as a married couple filing jointly, up to 50% of your benefits will be subject to taxation. 
  • If your income exceeds $34,000 as an individual or $44,000 as a married couple filing jointly, up to 85% of your benefits will be subject to taxation. 

It’s important to note that you cannot be taxed on more than 85% of your Social Security benefits. 

Also, the percentage of benefits you pay taxes on is on a sliding scale.  So the exact percentage can, and will, range between 0% all the way up to 85% – again, depending on your Provisional Income and where it falls in the income thresholds mentioned above.

No matter how much you make beyond the income ranges listed above (for married and single filers), no more than 85% of your benefits can be included in your taxes.  That is the maximum percentage in which your benefits can be taxed.

Strategies to Lower Or Eliminate Taxes In Retirement 

While it may be disheartening to learn that your social security benefits may be taxed in retirement, I do have good news: There are strategies that you can take advantage of to not only lower the amount of social security taxes in retirement, but also lower your other taxes as well.  Even if you aren’t able to reduce the taxes you owe on Social Security, you can still reduce other taxes you may owe in retirement.  

Essentially, you want to get your income below the Provisional Income threshold or as low as possible. The important point to note is that most of the methods for reducing the taxes owed on your Social Security benefits need time to fully reap the benefits.  

One option could be to move your 401(k) or IRA to a Roth IRA years before you start collecting Social Security benefits. While you will have to pay taxes the year you convert to a Roth IRA, withdrawing money in the future from the account will be tax-free.

If you would like to go into more detail on this topic, here are two helpful resources:

As with all things when it relates to finances, it’s better to get started sooner rather than later.  So when you learn about the tax strategies I teach in the resources mentioned above, start taking action immediately so that you can have the ability to lower, or even eliminate, the taxes you’ll need to pay in your retirement.  

Social Security And Taxes Key Takeaways:
  • You Pay Taxes On Social Security While You Work (Via Payroll Taxes), And Potentially When You Receive Your Benefits.
  • The Amount Of Taxes You Will Pay On Your Social Security Benefits Depends On Something Called Your Provisional Income.
  • Anywhere From 0% Up To 85% Of Your Benefits Can Be Included In Your Taxes.
  • There Are Strategies That You Can Use To Reduce, Or Eliminate, Your Taxes In Retirement.  Two Resources For You Are:
  • My Book The Retirement Tax Bomb
  • My Course, Based On The Book, Which You Can Get For Free At Retiretaxbomb.Com