Speaking of Social Security and distribution planning, one lament of the newly-retired person is realizing that a portion of their Social Security benefits is often taxable. Social Security payments have been subject to taxation above certain income limits since 1983.
Here’s how the IRS calculates how much is taxable:
- The calculation begins with your adjusted gross income (AGI) from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions (RMDs) from qualified retirement accounts, and other taxable income.
- Tax-exempt interest is then added. (It isn’t taxed, but it goes into the calculation.)
Then, apply the figure to these rates (effective for 2024):
Individuals:
- From $25,000 to $34,000: You may have to pay income taxes on up to 50% of your benefits.
- More than $34,000: You may have to pay income taxes on up to 85% of your benefits.
Married:
- From $32,000 to $44,000: You may have to pay income taxes on up to 50% of your benefits.
- More than $44,000: You may have to pay income taxes on up to 85% of your benefits.
To be clear (and we get this question a lot), this does not mean that you lose 50%- 85% of your Social Security benefits. It means that above a certain income level, a portion of your Social Security benefits are taxable.
So, will you pay taxes on your Social Security benefits? Maybe. 0% might be taxable. A maximum of 85% might be taxable. Unfortunately, this is just in relation to federal tax, so depending on where you live, you may also have to pay state income taxes. Because paying taxes will remain a stubborn part of retirement, financial planning is an important part of the process to help you optimize your distribution strategy.
Multnomah Group is a registered investment adviser, registered with the Securities and Exchange Commission. Any information contained herein or on Multnomah Group’s website is provided for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Multnomah Group does not provide legal or tax advice.