When determining your income taxes in retirement and on your Social Security benefits, the IRS uses your “combined income” and filing status as the two main markers. At $36,000 a year from Social Security, none of your benefits would be taxable, since only half of your benefits are calculated into combined income. However most, if not all, retirees have additional income sources, such as retirement account withdrawals, a pension, part-time wages and more. When accounting for these as well, you may be subject to taxes on up to 85% of your total benefits. You may be able to manage this by using Roth accounts, getting income from non-taxable sources or reducing your income by working less or taking smaller withdrawals.
Are you looking for professional help with managing your retirement income and Social Security benefits? Speak with a financial advisor today.
How Social Security Benefits Are Taxed
If you receive Social Security retirement benefits, you may have to pay income taxes on them. To see whether you’ll need to, divide your Social Security income in half. Then add your adjusted gross income (AGI), plus any income from tax-exempt sources, such as municipal bonds. The result is called your “combined income” and it, along with your filing status, helps determine how much of your Social Security income is taxable.
For example, if you get $36,000 a year ($3,000 a month) from Social Security and have no other income, your combined income is $36,000 divided by 2, or $18,000. None of your benefits are taxable if your income is below $25,000 for a single filer or $32,000 for joint filers. So, in this case, you’d owe nothing to the federal government.
Odds are good, though, that you don’t rely only on Social Security. The Federal Reserve’s Report on the Economic Well-Being of U.S. Households in 2022 found 79% of retirees had one or more sources of private income. If you’re one of this majority, some of your Social Security could be taxable. Here’s how the brackets work:
- Single Filers
- Combined income is less than $25,000: none of your benefits may be taxable
- Combined income is between $25,000 and $34,000: up to 50% of your benefits may be taxable
- Combined income is above $34,000: up to 85% of your benefits may be taxable
- Joint Filers
- Combined income is less than $32,000: none of your benefits may be taxable
- Combined income is between $32,000 and $44,000: up to 50% of your benefits may be taxable
- Combined income is above $44,000: up to 85% of your benefits may be taxable
An Example of Social Security Benefit Taxes
To see how this works, consider a single filer who receives $36,000 in Social Security and withdraws $24,000 from their retirement account annually. For this person, their combined income would be half their Social Security income ($18,000), plus $24,000 in other income, for a grand total of $42,000.
At $42,000 in combined income for a single filer, up to 85% of their Social Security benefits are taxable. That doesn’t mean you have to pay an 85% tax rate on your $36,000 in Social Security benefits, nor does it mean all 85% will actually apply.
To calculate how much your taxes are on these Social Security benefits, you’ll want to follow the complex process of determining it via IRS Publication 915. Using this calculation method, the IRS document will help you whittle down your income following a 19-step process that’s too complex to review here. In short, when coming to the end of this calculation, this situation will work out to your taxable Social Security benefits equaling $11,300. This amount will then need to be added to your taxable income for the tax year.
If you need help with Social Security or other retirement benefits, a financial advisor could be helpful. Talk to an advisor today.
Strategies for Potentially Reducing Your Social Security Benefit Taxes
You may want to consider moves to potentially shrink the amount of your Social Security benefits that are taxed. One is to generate less income from sources that increase combined income, should you be able to afford it. Again, combined income is equal to your AGI (withdrawals from retirement accounts, wages etc.), tax-exempt income, etc. However, you may not be able to afford going this route.
You could take withdrawals from a Roth IRA, should you have one. Roth withdrawals are not included in combined income, as they feature tax-free benefits in retirement. You could take any amount of Roth withdrawals without exposing any of your Social Security benefits to taxation. If your retirement savings are in both Roth and pre-tax accounts, you can also take a blended approach to avoid emptying your Roth account too quickly, while still minimizing some taxable income increases.
Selling investments that have lost value can also allow you to write off up to $3,000 a year, further reducing your combined income. If you don’t have any such investments, you might use cash reserves to pay the bills Social Security can’t cover. That also won’t increase your combined income.
Finally, you can time withdrawals. For instance, let’s say in one year your combined income is already so high that the maximum 85% of your Social Security benefits will be taxed. You could take even more withdrawals than you need that year and bank them for next year’s expenses. Since 85% is the maximum, you won’t be exposing any more Social Security benefits to taxes this year. And then next year, you can withdraw less and again minimize taxation of Social Security dollars.
These simple examples for illustration purposes don’t include some potentially important considerations. For instance, some states tax Social Security benefits. And, while most of these follow the federal approach, some apply taxes differently. Also, individual details such as filing status and whether a spouse also has Social Security benefits can significantly affect these situations.
Retirement Planning Tips
- If you’re looking for ways to manage your Social Security benefits alongside your other sources of retirement income, a financial advisor can help. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Social Security is a critical part of many retirees’ income plans. Estimate how much you’ll get from this important source of income using SmartAsset’s Social Security calculator.
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