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It’s no secret that the Social Security system can be complex.
One of the most complex parts of Social Security is how your benefit will be taxed. When S.S. was first put into law, it was said that it wasn’t taxed and would never be.
Well, that changed in 1983. Now everyone’s benefit will potentially become taxable.
But exactly how much of your benefit will become taxable will depend on the
Social Security Tax Calculation Formula or otherwise known as provisional income.
Understanding this formula is critical to building a tax-efficient retirement income.
In this video, we’ll walk through step-by-step examples showing exactly how to determine how much of your Social Security benefit will be taxable and a few strategies you can use to keep that taxable number small.
If you have any questions, don’t hesitate to ask them in the comments below.
#SocialSecurity #retirementincomeplanning
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How is Your Social Security Benefit Taxed in Retirement?
The Social Security system has long been a pillar of support for retirees in the United States, providing a source of income to millions of Americans. However, many people are unaware that their Social Security benefits may be subject to taxation.
To determine the taxability of your Social Security benefits, you first need to understand your combined income. Combined income is calculated by adding your adjusted gross income (AGI), any nontaxable interest income, and 50% of your Social Security benefits. It’s essential to note that Social Security benefits received by themselves are not automatically taxable.
Next, you need to know which filing status applies to you. If you are filing as an individual and your combined income falls between $25,000 and $34,000, up to 50% of your Social Security benefits may be subject to taxation. If your combined income exceeds $34,000, up to 85% of your benefits may be taxable.
For married couples filing jointly, if your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefits may be taxable. If your combined income exceeds $44,000, up to 85% of your benefits may be subject to taxation. It’s worth noting that if you and your spouse are filing separately and lived apart for the entire tax year, all of your benefits would be taxable regardless of your combined income.
It’s important to understand that even if your Social Security benefits are taxable, they will not be taxed at the same rate as ordinary income. Instead, the IRS uses a formula to calculate the taxable portion based on your combined income. This means that the higher your combined income, the greater the percentage of your benefits that will be subject to taxation.
For individuals who have other sources of retirement income, such as pensions or traditional IRA withdrawals, adding Social Security benefits to the mix may push them into a higher tax bracket. Consequently, retirees need to carefully plan their withdrawals and income sources to minimize the tax impact on their Social Security benefits.
One strategy some retirees employ is to take advantage of partial tax exemptions. By managing their income sources effectively, retirees can reduce their combined income and potentially keep a larger portion of their Social Security benefits tax-free. Examples of strategies to achieve this include considering Roth IRA conversions, delaying other retirement distributions until later years, and being mindful of the timing and amount of capital gains realized.
It’s worth noting that not all states tax Social Security benefits in retirement. Currently, 13 states impose no taxes on Social Security income, while others have varying thresholds and rules.
In conclusion, understanding how Social Security benefits are taxed in retirement is crucial for retirees to effectively plan their finances. By being aware of the potential tax implications and implementing strategies to minimize their tax burden, retirees can make the most of their retirement income while enjoying the benefits offered by the Social Security system.
Zero for me all my retirement is in a roth
After retirement getting Social Security, I can work and what kind of tax have to pay and what amount after the security Social Security pay tax. Please let me know thank you.
Yes, it is more desirable to have a larger social security benefit due not only to the favorable taxation but also for the inflation adjusted treatment.
Now, SS benefits are subject to changes by Congress. So, this makes it volatile as the deal can change at any time or cut the benefit as needed. Same with portfolios, they are at wimps of the markets. Risk Volatility is a problem in both cases. SS benefits are the lesser of two evils.
Finally, a video of this process that makes sense.
What about standard deduction. Where does that play in ?? Not clear in video.
I just got approved for SS payments (@ 65), got my first check last month. Birth month is January. My FRA is 66 and 8 months, so this being 6/2023, 14 or so more months to go before FRA. Can I trade stocks and make money in my brokerage account without penalizing/threatening my SS?!?!? I know I can make $21,400 per calendar year, or around $1733 a month. The money made in the brokerage account is all short term capital gains so will it be considered as wages/salary or capital gains and not affect the SS?!?!? I don't mind paying the federal taxes, I just don't want to jeopardize my SS!!!
First of all, SS is NOT a benefit. It’s a retirement fund you and your employers paid into during your working career. Now, how many people have you heard of that pass away after a few years? What happens to their money? It goes back into the system. Taxing SS should be banned, and survivors should be paid the funds that one has left behind as a result of an early death.
I have them take 7% out of my checks each month,
Excellent explanation. I didn't know about the 85% tax range. Thank you for the thorough examples.
Absolutely stunning in the way you layed it out. Much Thankks!!!!!
Can you please add an example using $30K social security + $100K taxable income, where provisional income = $115K.
I see there is another comment below from Tein Bao with the same question.
Question: How is a provisional income of $115K used in the married table to calculate the amount of taxable social security of $25,500 ($30K SS x 85% = $25,500)?
When is it simpler to just multiply the SS amount ($30K) by 85% to get the taxable SS amount ($25,500), rather than use the married table calculations in the video?
Answer: Patrick's answer to Tein Bao's question below also answers my question.
In summary, the taxable SS amount is the SMALLER of either
a.) the result calculated from the formula in this video, or
b.) 85% of the SS Benefits ($25,500)
Thank you.
Good info with realistic numbers explained in a simple to understand fashion
I'm headed towards SS and I still can't wrap my head around them stealing this money. It's pure theft. Taking a chunk out of what is a relatively a small amount of money that the elderly to need live off of. It's unconscionable.
My wife still works ($) + my pension ($) + ss (50%) is the total income filing married???
I’m confused; I thought social security don’t touch your IRA ? I have a Roth IRA and Roth 401k
Thank you. Finally, someone explained this correctly, in a manner I can understand……
Great video dear, very helpful
very clear thx. one question i have is…My wife still works and i will be collecting SS benefits this year, so i am assuming in this scenario her income will impact what my SS taxation equation will become?
They taxed the money before you put into the social security system and now they want to tax it again when you take it out.
The best explanation EVER. Thank You
None of it should be taxed…Who pulled this one over on the tax payer?
For example #3, their gross taxable income before deductions would be IRA withdrawal 15,000+13,225 = 28,225?
In any other pension there is a taxable basis of money in the fund that has already been taxed before it was contributed. This money is not taxed again when it is withdrawn. SS is treated as welfare because your taxes depend on your current income without regard to how much after- tax money you paid into the system as payroll taxes. Originally SS was not taxed at all. Thank Biden for voting to tax your SS check when he was a congressman.
No matter what you name it and how you calculate it, it is still government extortion !!
I am expecting pension of.about $643.00 from my employer plus Society Security about $700 per month. How do I calculate taxes this income?
My question is I discovered my Dad owned 100 shares of stock from utility company SPIRE Inc. If I take ownership these stock how will value of stock affect my taxes?
i have stocks that i have owned over a year that i sold–you did not talk about capital gains that fits into the picture
I think this could have benefitted from a 4th simple example. For a retired married couple filing jointly with gross taxable income in excess of $44,000, they can ignore the complexity here – 85% of their entire social security benefit is subject to income tax.
On this subject you have the clearest explanation among all the other videos I have seen. Thank you very much.
Thanks so much for your video. I loved your video❤❤❤, very well explained. Finally, I understood how they calculate on SSA
The question of how much of your SS gets taxed and by what rate when you are REAL savers that have several million in savings that derive a large sum in dividends and capital gains for taxable income, NOT including distributions you have to take fro 401k's, IRA's. It's like our pension payment we receive goes to just pay the taxes on the investments.
Let me get this straight, I’m single and make 30k per year from Walmart so I get taxed on up to 50% of my SS and paying in to SS again because I’m working? WTH?