Many people do not realize that their Social Security Benefits may be taxed.
If you have a taxable income in retirement above a certain threshold, up to 85% of your social security benefits can be taxed. The calculation for the threshold income actually includes half of your social security benefits.
Whether or not you trigger taxation on your benefits will depend on your “combined” income, which is a sum of your adjusted gross income (taxable income, which can include taxable sources such as qualified retirement plans), your nontaxable interest (from Muni bonds in particular, Roth IRAs are excludable), and half of your household Social Security benefits.
If your combined income is between $25,000 and $34,000 (as an individual) or $32,000 to $44,000 (filing jointly), you may pay taxes on up to 50% of your benefits. If your combined income is over $34,000 (as an individual) or over $44,000 (for joint filers), you may have to pay taxes on up to 85% of your benefits.
It is notable that these threshold limits have not been adjusted for inflation in quite a while, and they may never be, especially since the Social Security system is starting to experience negative cash flows.
It’s definitely important to find out what percentage of your Social Security may be taxed so that you’re able to plan ahead.
When Can I Start Receiving My Social Security Benefits?
What are Federal Tax Brackets?