By Theresa Fry, Senior Vice President and Manager, IRA’s and Retirement Planning
At one time, all Social Security benefits were tax free. Today, if your only source of retirement income is Social Security, then it may still be tax free. Most people must pay income taxes on a portion of their Social Security income. The higher your income, the more taxes you’ll pay on your benefits.
Taxes on Social Security are determined based on your combined or “provisional income”. Provisional income results from adding together your Adjusted Gross Income (AGI), your tax-exempt interest (for example, interest from municipal bonds or U.S. savings bonds), and half of your annual Social Security benefit amount. AGI includes income from a variety of sources. If you are still working, your wages or self-employment income would be included in your AGI. Other sources of income that can increase your AGI include interest income, dividends, taxable distributions from 401(k)s or IRAs, and pensions. Roth IRA distributions, however, are not included in your AGI or your provisional income.
The chart below provides a summary of how much of your Social Security benefits will be taxable based on your tax filing status and provisional income. These amounts are not adjusted for inflation, so over time, more and more people will have to pay income taxes on their Social Security benefits.
|If your tax filing status is…||Single||Married, Filing Joint Return|
|And your provisional income is…||Less than $25,000||Less than $32,000||0% of Social Security Benefits are Taxable
|$25,000 – $34,000||$32,000 – $44,000||Up to 50% of Social Security Benefits are Taxable
|More than $34,000||More than $44,000||Up to 85% of social Security Benefits are Taxable
If your benefits are taxable, you can instruct Social Security to withhold taxes from your monthly benefit payments. They offer four choices; 7%, 10%, 15% and 25%. (Note: State taxes on Social Security vary so check with your tax professional if you need help.)
Benjamin F. Edwards & Co. does not provide tax advice, therefore it is also important to consult with your tax professional for additional guidance tailored to your specific situation.