Are my Social Security Benefits Taxable?
Did you know that your Social Security benefits may be taxed in retirement? Taxation of Social Security income usually occurs when retirees have income in addition to their Social Security benefits, such as wages, self-employment income, IRA distributions, interest, dividends, and other taxable income that is reported on their tax return.
However, the amount of your benefit that is taxed is capped. No one pays federal tax on more than 85 percent of their Social Security benefits. For example, if you receive $10,000 in Social Security benefits in a year, you will pay taxes on no more than $8,500 of those benefits ($10,000 x .85 = $8,500).
What is combined income?
How much of your Social Security benefit is taxed depends on the amount of your combined income in a taxable year. Your combined income is your adjusted gross income + nontaxable interest + one-half of your Social Security benefits. Depending on your filing status and the amount of your combined income, your benefits will be taxes according to the table below.
Social Security Benefit Statement
Once you begin receiving benefits, each year in January you will receive a Social Security Benefit Statement (Form SSA-1099), which will show the amount of income you received in the previous year from the program. The information on your Social Security Benefit Statement will be used when you complete your federal income tax return to determine if your benefits are subject to taxation for that tax year.
Understanding how various income sources are taxed is a critical component of retirement planning. After all, as the old saying goes, it’s not what you make that matters; it’s what you keep!
Andrea L. Blackwelder, CFP®, ChFC and Joseph D. Clemens, CFP®, EA are the founders and partners of Wisdom Wealth Strategies. Their shared passion is simple: to bring financial empowerment, understanding, and peace-of mind to people who wish to improve their financial future, build wealth for their families, and achieve financial independence. Click here to find out more about how you can work with Wisdom Wealth Strategies.
