Social Security: They took it from every paycheck during your working years and in retirement you’ll get it back—and then you’ll pay taxes on it. WHAT?
To be fair, the Social Security tax was taken from your gross earnings less deductions not subject to the tax, so you’ve never paid income tax on this money. Furthermore, around 50% of Social Security beneficiaries will pay taxes on at least a portion of their benefits. Of course, that doesn’t make it sting any less.
The calculation on what is taxable is complicated—after all, it is Social Security. There are several factors that determine your tax liability on benefits, including income level, tax filing status, and state of residence, because there are 13 states that impose a tax, each with their own computation method. Thankfully, Georgia is not one of them.
In general, the tax is based on provisional income, which is defined as modified adjusted gross income (MAGI) plus half of the Social Security benefits, plus any tax-exempt interest from investments such as municipal bonds. Further ensuring all CPAs have a job, MAGI is calculated differently each time it is mentioned in the tax code. In this context, it’s generally adjusted gross income listed on your 1040 before including the taxable portion of your benefits. This then determines how much of your benefit is taxed.
In 2021, if provisional income is less than $25,000 for single filers or less than $32,000 for married filing jointly, you’re not taxed on your Social Security benefit. You can be taxed on up to 50% of your benefit if your provisional income is between $25,000 and $34,000 for single, and $32,000 and $44,000 for MFJ. Anything above those brackets could make up to 85% of your Social Security benefit taxable.
You’re not taxed 85% on your benefit—it’s up to 85% of your benefit that is subject to income tax. That is a widely popular misconception—and investors ask it all the time, especially when their adviser recommends you take your Social Security benefit as early as you can, depending on your circumstances. Generally, if you have money coming in that covers your living expenses and you are not having to liquidate your retirement savings, it is better to wait until full retirement age to begin benefits. However, if you are tapping into your retirement savings, then it may be beneficial to begin Social Security benefits.
How much you might be taxed on your benefits really doesn’t play into the decision as to when to take benefits. You want to look at the factors that will allow you to maximize your benefit, including how much you are earning and how much of a permanent reduction you may take for taking benefits before full retirement age. There is no beneficiary to your Social Security benefits when you die—payments stop. Therefore, delaying your start date to increase your benefit is a gamble gamble if you will live long enough to receive more than you would have had you started earlier at a lower amount.
Basically, maximizing Social Security benefits requires the help of an expert. A trusted CPA or financial adviser can help you determine what might work best for your situation.
If you have questions on your Social Security benefits, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166
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