A very common question we are asked at Modern Wealth Management is if Social Security is tax-free.
Short answer: If you only have income from Social Security you will not pay any taxes on your Social Security. However, if you have other income sources, you might be paying taxes on up to 85% of your Social Security.
Provisional Income
Firstly, you must understand provisional income in order to determine if your Social Security is tax-free. Provisional income is used by the IRS to determine if you’ll be paying taxes on your benefit or not. It’s calculated by taking 50% of your combined Social Security payments. After that, add that to any other source of taxable income and any tax-free income from municipal bonds.
Is Your Social Security Tax-Free? Here’s How it Works
During the Reagan Administration, the laws were changed so that a married couple filing a joint tax return, who had over $32,000 of provisional income, would pay taxes on up to 50% of their Social Security. During the Clinton administration that law was expanded so that married couples filing a joint tax return with over $44,000 of provisional income could pay taxes on as much as 85% of their Social Security benefits. You can find more information on those changes in Social Security on this piece on the Social Security Administration website.
There are many techniques and planning strategies that can allow you to have far more income deposited to your checking account than provisional income. This can help mitigate not only taxes on your Social Security, but reduce your overall taxes throughout your retirement.
In conclusion, it’s crucial you discuss your Social Security benefits and how those relate to your retirement and tax plan with a trusted financial advisor. At Modern Wealth Management we don’t just look at one segment of your financial plan. We look at the entire picture so you’re getting the most out of what you worked for your entire life.
Interested in more information? Make sure to check out our Education Center for videos, audiobooks, and white-papers on Social Security. Or if you’d like to schedule a complimentary consultation with one of our advisors below.
Dean Barber
Founder & CEO
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The views expressed represent the opinion of Modern Wealth Management an SEC Registered Investment Advisor. Information provided is for illustrative purposes only and does not constitute investment, tax, or legal advice. Modern Wealth Management does not accept any liability for the use of the information discussed. Consult with a qualified financial, legal, or tax professional prior to taking any action.