Some retirees are surprised to learn that Social Security is taxable. Depending on your income level, up to 85% of your Social Security benefits may be taxable at ordinary income rates. But how much of your benefits are taxable and is your state taxing your Social Security benefits?
Social Security benefits have been subject to taxation above certain income limits since 1983, and no inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits. Up to 50% of Social Security income is taxable for individuals with a total gross income (including Social Security) of at least $25,000, or couples filing jointly with a combined gross income of at least $32,000. Up to 85% of Social Security benefits are taxable for an individual with a combined gross income of at least $34,000, or a couple filing jointly with a combined gross income of at least $44,000.
For purposes of determining how the Internal Revenue Service treats your Social Security payments, “income” means your adjusted gross income plus non-taxable interest income plus half of your Social Security benefits. You may see this also referred to as modified adjusted gross income, or “MAGI.”
On top of paying federal taxes, you may have to pay state taxes on your benefits. There are currently 13 states that tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia. How much of the benefits are taxable depends on each state.
We all want to pay as little in taxes as possible. But consider that if you have enough income during retirement that you are paying taxes on your Social Security benefits, usually means that you have other sources of income and you are not entirely depending on Social Security to pay your bills, and that is great news! If you have any questions about the taxability of your Social Security benefits, be sure to give your Financial Planner a call to discuss what makes up your specific modified adjusted gross income.
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