Taxing Social Security

Taxing Social Security

Today we talk about taxing Social Security. We will discuss:

  • the factors that go into determining whether your Social Security income is taxable or not
  • give you some examples, and
  • tell you about a few potential surprises that you may encounter.

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Taxing Other Types Of Retirement Income

Last week we discussed how other types of common retirement income are taxed. Click Here to watch that episode.

Today, we focus on taxing Social Security benefits. For some people, your Social Security may be taxable. Here is how we can determine if your benefits will be taxed.

Provisional Income

It starts with your provisional income. To determine if your Social Security is taxable, you’ll need to compute this. It includes:

  • half of your Social Security
  • dividends
  • interest, both taxable and non taxable
  • earnings
  • pension income
  • IRA distributions, and
  • other income

If your provisional income is less than

  • $32,000, for a couple
  • $25,000 for a single person,

your Social Security benefits are not taxed.

But if your provisional income is between

  • $32,000- $44,000 for a couple
  • $25,000- $34,000, for a single filer,

50% of your Social Security income is taxed.

And if your provisional income is over

  • $44,000 for a couple
  • $32,000 for a single person

85% of your Social Security benefits is taxed.

Examples

John and Carol

John receives about $27,600 in Social Security benefits and Carol receives $21,600. That totals $49,200. Half of their benefit is $24,600. They receive $2,000 a month from John’s IRA, for a total of $24,000. Total, they earn $5,000 per year in dividends and another $1,500 in interest.

Their provisional income is $55,100. This means 85% of their Social Security benefits are taxable.

taxing Social Security

Mary

Mary was recently widowed. She receives $21,600 in Social Security, half of which is $10,800. She takes a required minimum distribution from her IRA which was $8,300. Her provisional income in this case is $19,100. This is below the $25,000 threshold, so her Social Security benefits are not taxed.

taxing Social Security

Carl

Carl is single. He receives $2,000 per month from Social Security, $24,000 total. Half of that is $12,000. He also gets about $2,000 in dividends and $1,000 in interest. The rest of Karl’s income comes from a Roth IRA. He takes $50,000 from his Roth account. His provisional income is $15,000.  His Social Security benefits will not be taxed.

The Roth IRA distributions do not add to his provisional income.This is an additional benefit of using a Roth IRA in your retirement planning. Distributions from the Roth are not taxed. They also won’t make your Social Security benefits taxable.

taxing Social Security

Potential Surprises

Change in Marital Status

The first surprise is a sudden change in your marital status. If you find yourself suddenly single, you may owe more in taxes. The income limits for single people are lower than those for married couples. A sudden change in marital status may lead to more of your social security benefits being taxed.

Change in Income

A sudden increase in your income can also have a hidden surprise. This normally happens when you reach the age for required minimum distributions. At age 72, you have to start taking money from your IRA account. This will add to your provisional income. The distribution may cause your Social Security income to be taxed

Talk to a Certified Financial Planner™ Professional

There are a lot of factors that affect your taxes in your retirement, and you can manage some of them. Talk to a financial planner to learn more.

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

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How Retirement Income is Taxed

How Retirement Income is Taxed

How Retirement Income is Taxed

Today we look at how the most common types of retirement income are taxed.  We look at:

  • The common types of accounts retirees use
  • The types of income taxed at the highest rates
  • Types of income which receive favorable tax treatment

Watch Now: How Retirement Income is Taxed

how Retirment Income is Taxed

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When you retire, you go from earning a paycheck to using your savings to create a paycheck. You will still have to pay income taxes. Today, we look at the common types of accounts retirees use to create income, and how they are taxed.

Retirement Plans and IRA's

This might be a 401k, a 403b or even a 457 deferred compensation plan. Many people roll those over into an IRA.

The taxation of the income generated from those accounts depends on the contributions. If you made pre-tax contributions—meaning you took a tax deduction—the income is taxable. Your contributions, your employer’s contributions, and the earnings are taxed as ordinary income. Tax rates for ordinary income start at 10%. The maximum tax rate is 37%.

If you used the Roth type accounts, the contributions happened on an after tax basis. This means withdrawals from these accounts are not taxed.

Individual and Joint Accounts

The second type of account that retirees use is an individual or a joint account. If you have this type of account, you pay taxes “as you go”. The investments in those accounts often pay dividends or interest. Interest is usually taxed as ordinary income. Dividends paid by a common stock get favorable tax treatment. In most cases, the highest tax rate for qualified dividends is 15%.

You may also have capital gains. A capital gain happens when you or one of the investments you own sells an investment. If you own a mutual fund, that mutual fund may buy and sell stocks and bonds inside the mutual fund. The gains pass to you as a shareholder.

If you own an individual investment, and you sell those shares, you can generate a capital gain as well. If you owned the position for at least a year, the gain is a long-term capital gain. Long-term gains get favorable tax treatment. The highest capital gains rate is 20%. Most people will pay 15%. The full amount of the sale is not usually taxed. Taxes are due on the amount above what you originally paid for the investment.

This can be a factor if you are using a systematic withdrawal. This strategy involves selling shares of your investments to generate monthly income. Part of the income is going to be taxable, and part of it is going to be return of your principal. The taxable part may get taxed at lower rates.

Pension Plans

The other type of account used to create income in retirement is a pension plan. If your company offered a pension plan, the income is taxable as ordinary income.

Annuities

Another common type of account is an annuity. If you annuitize a contract, part of the income is taxable. The balance is a return of your principal.

Social Security

The last type of income source that’s taxable in retirement is Social Security. We will cover taxes of Social Security benefits next week.

Talk to a Certified Financial Planner™ Professional

Knowing how taxes impact retirement can help you plan for a better future. If you have questions or concerns, talk to a financial planner.

 


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About the Author

Neal Watson is a Certified Financial Planner™ Professional and a Financial Advisor with Fleming Watson Financial Advisors.    He specializes in helping hard working, middle class families plan for retirement.

Our Most Recent Videos And Posts