A Taxing Reality of Retirement


Retirement, Social Security, Taxes


June 27, 2024

Once you start collecting your Social Security benefit, there’s a strong possibility you may owe income tax on a chunk of your benefit.

 

The Internal Revenue Service says more than 25 million tax returns for the 2022 tax year reported Social Security income that was taxable. That’s nearly 6% higher than the number of returns that owe tax on Social Security a year earlier. 

 

And it’s not a tax that only impacts the very wealthy. 

 

The only way to steer clear of paying income tax on Social Security benefits this year is if you are single with a combined income below $25,000 or married and you will file a joint tax return with a combined income below $32,000.

 

The key is to understand what the IRS considers combined income so that you can figure out if you will be hit with this tax.

 

Combined income is:

 

Your adjusted gross income reported on line 11 of your 1040 tax form + income from municipal bonds/funds + 50% of your annual Social Security benefit.

 

I want to be clear; this is a straight-up income tax that applies to all beneficiaries. It is separate from the “earnings tax” that you may run into if you start claiming social security before your full retirement age and are still working.

 

Now for some better news. No one pays income tax on 100% of their Social Security benefit, regardless of how high their income is.

 

If you are single with a combined income between $25,000 and $34,000 or married filing a joint tax return with a combined income between $32,000 and $44,000 you will owe income tax on up to 50% of your Social Security benefit.

 

If your combined income is above $34,000 (single) or $44,000 (married/joint filing), up to 85% of your Social Security benefit can be taxed.

 

The actual tax owed comes with its own calculation. It’s a bit complicated. Your tax pro can run the numbers for you. Or you can dive into this online worksheet from the IRS. Line 1 of the worksheet asks for your annual Social Security benefit amount. If you’ve yet to start collecting, by now I sure hope you’ve checked out an official estimate from the Social Security website. If not, head on over to ssa.gov. Once you register (it’s free) you can get an official estimate based on your actual earnings record on file with Social Security. 

 

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