A common question we receive at Modern Wealth Management is “How will my Social Security be taxed?”
When Social Security was originally formed it was intended to be a tax-free source of income. However, during the Reagan Administration the laws were changed so that if a married couple filing a joint tax return had over $32,000 of provisional income, they would pay taxes on up to 50% of their Social Security. Single taxpayers would pay tax on up to 50% of their Social Security if their provisional income exceeds $25,000.
(Simply put, provisional income is the measurement that the IRS uses to calculate if you need to pay taxes on your Social Security benefits. This number is computed by adding your adjusted gross income, tax-exempt interest, and 50% of your Social Security benefits.)
Years later during the Clinton administration, that law was expanded. Today if you’re married and file a joint tax return, then a combined income between $32,000 and $44,000 puts you in the 50% taxable range and income over $44,000 means that up to 85% of your benefits are taxable. If you’re married and file separately, up to 85% of your benefits can be taxed regardless of your income. Today if you are a single taxpayer, if your provisional income exceeds $25,000 but is not more than $34,000, you will be in the 50% taxable range. If your income exceeds $34,000, up to 85% of your benefits may be taxed.
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.
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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.