Did you know that your Social Security benefits could be taxed? If not, Pure’s Financial Advisor, Ian Barr, CFP®, breaks down how Social Security is taxed and what it means for you. Understanding the impact of these taxes on your benefits is crucial for maintaining your overall retirement income and financial health.
Transcript
Picture this: You worked hard for decades, contributed faithfully to Social Security, and now you’re looking forward to those retirement benefits you’ve earned. But here’s the catch—what if I told you that a portion of your Social Security benefits could actually be taxed? It’s a reality that many retirees don’t anticipate, and it can have a significant impact on your retirement income. Today, I’m going to break down how Social Security is taxed and what that means for you.
Let’s start with the basics—what does it mean for Social Security to be taxed? When you receive Social Security benefits, they’re not automatically tax-free. The amount of tax you owe depends on your combined income, which is the total of your adjusted gross income, plus any tax-exempt interest, and half of your Social Security benefits. In other words, your Social Security benefits are combined with other income sources, and that total determines if and how much of your benefits will be taxed.
Here’s how that works in real terms: If your combined income as a single filer is between $25,000 and $34,000, you could be taxed on up to 50% of your Social Security benefits. If your income exceeds $34,000, that percentage increases to 85%. For married couples filing jointly, if your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable. And if your combined income exceeds $44,000, up to 85% of your Social Security benefits could be taxed.
Now, let’s talk about how those taxes are applied. The portion of your Social Security benefits that is taxable is included as part of your overall income, which is taxed at your regular income tax rates. So, not only do you need to be mindful of your Social Security benefits, but also any other sources of income you have, like wages, pensions, interest, or dividends, because they all contribute to your taxable income.
What does this mean for you? Well, in simple terms, if you have substantial income from sources other than Social Security, you might find yourself paying taxes on a significant portion of your Social Security benefits. And this can affect how much money you have left for living expenses, health care, travel, or anything else you’re hoping to enjoy in retirement.
Being aware of how taxes on your Social Security benefits could impact your overall income means you can make more informed decisions about your withdrawals, investments, and even when you decide to start taking Social Security. If you’re unsure how Social Security taxes might affect your retirement, or if you’d like to explore ways to minimize that impact, contact Pure for a free tax analysis.
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