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Unfortunately, taxes don’t end once you are retired. In fact, tax planning becomes even more critical once employment ends, as your goal becomes keeping more of what you’ve accumulated and losing less to taxes.

A common question among retirees is whether their Social Security income is taxable. In this post, we will examine Social Security taxation and help you calculate how much of your benefit is taxable.

How Social Security is taxed

The taxability of Social Security is dependent on your total income and tax filing status.

Generally, if your only source of income is Social Security, your benefits are not subject to federal income tax. However, if you have additional sources of income, a portion of your Social Security might be taxable.

How to calculate my combined income

The first step in determining how much of your Social Security is taxable is to calculate your combined income. Combined income is calculated as follows:

Combined Income = Adjusted Gross Income + Nontaxable Interest + ½ of your Social Security benefits

Let’s dive into this further…

Adjusted gross income includes various types of income that you are used to paying taxes on, including:

  • Wages
  • Dividends and interest
  • Capital gains
  • Distributions from tax-deferred retirement accounts
  • Pension income

Because it’s adjusted gross income, this is net of any adjustments including contributions to an IRA and student loan interest deductions.

Nontaxable interest includes interest from municipal bonds, which is normally not taxable. For purposes of calculating the tax on your Social Security benefits, this is added to the equation.

Notice only half of your Social Security benefits are considered for calculating your combined income.

Calculating how much of my Social Security is taxable

After you’ve calculated your combined income, the second step is to see at what threshold your benefits are taxed.

For Single Filing Taxpayers

  • If your combined income is under $25,000, your benefits won’t be included as taxable income.
  • If your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
  • If your combined income exceeds $34,000, up to 85% of your benefits may be taxable.

For Married Filing Jointly Taxpayers

  • If your combined income is under $32,000, your benefits won’t be included as taxable income.
  • If your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.
  • If your combined income exceeds $44,000, up to 85% of your benefits may be taxable.

This doesn’t mean your tax rate is 50% or 85%! This is the percentage of your Social Security benefits are considered part of your taxable income.

While the actual calculation can be tricky, you can try an online calculator like this one.

Can I minimize taxes on my Social Security benefits?

The best time to prepare for retirement taxes is before retirement, especially when it comes to minimizing tax on Social Security benefits. This is because the combined income thresholds described above have not been indexed for inflation.

These limits were set up in 1984 and updated in 1993. But without any adjustments, more and more retirees will have 85% of their benefits taxed just due to inflation. As you can see, these income thresholds aren’t very high. Even “middle-class” retirees will find themselves paying tax on most of their Social Security benefits.

So, what can a pre-retiree do to minimize future taxes? Seek out the guidance of a wise advisor who can recommend strategies to pay less taxes over your lifetime. Even though Social Security might be years away, the best time to prepare is now.

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