Up to 85% of your Social Security could be Taxable- Here’s the Formula
Investment Retirement Funding InsightsI have had many clients not realize their social security could be taxable.
So when you are talking to your advisor about retirement planning, make sure you consider the taxation on all your money. This is why it's so important to have different buckets of money that is taxed differently.
Here is the formula to help figure out how much of your Social Security could be taxable.
Combined Income = Your Adjusted Gross Income + Nontaxable interest + half of your social security benefits.
For a Married couple:
From $32,000 to $44,000: You may have to pay income tax on up to 50% of your benefits.
More than $44,000: Up to 85% of your benefits may be taxable
A Simple Example:
let's say you are a couple filing jointly:
Their combined Social Security benefit: $26,000
They took distributions from their IRA: $30,000
Using the formula: 30k (IRA Income) + 13k (half of 26k- SS Income)= 43k
To get the amount taxable, you would take the difference between the income (43k) and the threshold (32K) is computed at 50%:
$43,000-$32,000= $11,000: $11,000/2= $5500 is the amount taxable
What does this mean for you? How much income will you want in retirement? If the money you are pulling out is all taxable, the more of your Social Security benefit will be taxable.
#1. If you are about to retire, make sure you are considering this and planning for it.
Talk to your CPA.
#2. If you are not near retirement, be considerate of what you are putting money today.
For Example:
Every dollar you pull out of a traditional retirement account (tax deferred) is taxed at ordinary income rates. It also is included in the formula to figure out how much of your Social Security Benefit is taxable.
If you pull money from a Roth account (tax free) then it wouldn't be included in the formula.
#3. Plan holistically with your advisor, CPA and other professionals
The professionals in your life should know what you look like financially. What your goals are. They should also work together to make sure all gaps are covered.
Now that you understand how Social Security benefits can be taxed, how do you change or modify your strategy?
