Some of Your Social Security Benefits May Be Taxed
For most seniors, one of their retirement benefits is receiving income from Social Security. Of course, many feel they would have a hard time living on Social Security benefits alone. Its been widely documented that many Americans have not saved enough to fund their retirement. So, for many, continuing to work is part of their retirement plan. Income from ongoing work, added to personal savings, qualified plan retirement benefits, and Social Security benefits, help meet retirement income needs.
All well-and-good, but there may be a slight problem. Social Security recipients tend to count on their benefits being tax-free. Working in retirement can change that perhaps substantially. Once non-Social Security income reaches a threshold, Social Security benefits are taxed. What is the threshold amount? Add one-half of your Social Security income benefits to all your other income. Then compare your modified adjusted gross income to the (2008) base amounts:
Social Security income above the base amount will likely be taxable. Now, the question is how much? Generally, up to 50 percent of the Social Security benefits will be taxable. However, if your income reaches a second threshold, the percentage moves up to 85 percent if, in simplified form:
An example: A Married Filing Jointly couple has AGI without Social Security benefits of $43,000 and Social Security benefits of $18,000. Provisional income is $43,000 plus 50% of $18,000 = $52,000. The first $44,000 of provisional income will be taxed according to the old rules, and the final $8,000 of provisional income will be taxed under the new rules. Taxable Social Security on the first $44,000 of provisional income equals $6,000 (50% of ($44,000-$32,000)). Taxable Social Security on the final $8,000 of provisional income equals 85% of ($52,000 - $44,000), or $6,800. Finally, we add together the two components of tax ($6,000 and $6,800). The amount of Social Security benefits taxable is the lesser of this sum ($12,800) and 85% of net Social Security benefits ($15,300). Since $12,800 is less than $15,300, the sum of taxable Social Security benefits is $12,800.
Two points of clarification: first, there is no age threshold where benefits are no longer potentially taxable; second, none of this means that you will be taxed at either a 50 percent or an 85 percent rate. Rather, up to 85 percent of your benefits may be taxable. The rate you pay is your normal tax rate (not 85 percent).
You probably dont want up to 85 percent of your Social Security benefits to be taxable, so what can you do? One obvious conclusion is to limit non-Social Security income. This may mean cutting back on earned income. However, you may also be able to adjust income levels by lowering unearned income amounts -- for example, money from investments. Timing is (almost) everything.
Of course, if your income needs are great enough, paying income taxes on Social Security benefits may be more than offset by earnings from a good job. So, even though few people revel in the idea of paying more income taxes, doing so may be the best choice if it means earning enough to have a more pleasant retirement.
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