For many retirees, Social Security benefits are a crucial source of income. However, you might be surprised to learn that your Social Security benefits may be taxable depending on your overall income. The amount of your benefits subject to federal income tax can vary, and understanding the thresholds that trigger taxation is important for planning your finances.
The IRS does not tax all Social Security benefits. How much of your Social Security income is taxed depends on your total income, which includes any wages, pensions, interest, dividends, and retirement account distributions. The IRS uses a formula called your combined income to determine how much of your benefits will be taxed.
Combined income is calculated by adding:
If your combined income exceeds a certain threshold, a portion of your Social Security benefits will become taxable.
The IRS sets specific income thresholds at which Social Security benefits begin to be taxed. These thresholds differ based on your filing status:
Once your income exceeds these limits, the taxable portion of your Social Security benefits increases. The IRS may tax up to 50% of your benefits if your income is slightly above the threshold, and up to 85% if your income is substantially higher.
To minimize the tax impact on your Social Security benefits, you should track all sources of income, including retirement withdrawals, wages, and other earnings. You can reduce your taxable benefits by managing income streams, such as taking distributions from tax-deferred retirement accounts in a way that doesn’t push your income over the taxable thresholds.
It’s also wise to consult with a tax professional or financial advisor to help you understand how these rules apply to your specific situation, especially if you have multiple sources of income in retirement.
