Will Your Social Security Retirement Benefits be Taxed?

In the part of the country where our offices are located, Monterey and Pleasanton, California, we have a high cost of living and a high tax rate.  Investors are continually trying to find new ways to save on taxes.  And nothing hurts more than being stung by unexpected taxes.  

Most people are used to having Social Security taxes withheld from their paycheck during their working years. But not everyone realizes that their Social Security retirement benefits could be subject to income taxes—especially if you’re collecting benefits while working full- or part-time.

Since taxes may be one of your biggest expenses in retirement, let’s take a minute to consider whether or not they can impact your future benefits.

Internal Revenue Service (IRS) current rules won’t tax more than 85% of your Social Security benefits. If you’re an individual filer earning more than $34,000 in combined income, 85% may be subject to taxes. If you’re earning between $25,000 and $34,000, the taxable amount reduces to 50%.¹

For married couples filing jointly, a combined income greater than $44,000 will mean that 85% of your benefits may be subject to taxes. If you earn between $32,000 and $44,000, it’s again reduced to 50%.¹

This “combined income” we mentioned above refers to a specific formula developed by the IRS:¹

Your adjusted gross income + nontaxable interest + half of your Social Security benefits = Your combined income.

Knowing this formula is helpful as it tells us how the IRS views various types of income. For example, delaying payments until you’ve left your full-time job may be an effective way to help manage your potential tax obligation.  Also, receiving tax-deferred investments to delay income taxes can help reduce your combined income.

Saving money on taxes is an important part of a financial strategy to help you avoid outliving your assets, especially in high cost-of-living areas like California.

One of our top priorities is to help you feel confident and prepared for retirement. If you’d like to discuss your retirement income strategy, please feel free to contact us.

^{1. IRS.gov, 2022}