Taxes and retirement benefits influence each other both before and after they are earned. How much money you bring in determines your Social Security benefits, and those benefits contribute to what level you are taxed at by the federal government.
The more income you earn outside of Social Security, the larger a portion of your benefits are added to your taxable income. The maximum amount of benefits that can added to your taxable income is 85%. This amount, combined with your other income is called your modified adjusted gross income.
Here are the common tiers of Social Security benefit taxation:
Individual federal tax return with a combined income of:
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
Couples filing a joint return with a combined income of:
- between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
- more than $44,000, up to 85 percent of your benefits may be taxable.
So anyone bringing in more than $34,000 (single or married) can expect to pay some level of taxes on their benefits. Those above a $44,000 combined income will pay the maximum.
Remember though, the worst case in both scenarios is having 85% of your benefits taxed at your current rate.
Don’t confuse this with giving 85% of your benefits back in taxes. The highest tax rate in 2017 is 39.6% which only applies to married income above $470,701. Obviously there aren’t many households that fall into this income bracket. The tax rate for the average household during retirement would likely be in the neighborhood of 15%.
Let’s say you fall into the “average category” and brought home $73,800 in combined income. Of this, $25,000 was from Social Security benefits. 85% of $25,000 is $21,250. It is this amount that is taxed at 15% for total of $3,188 in taxes owed. Not too bad considering you have other income coming in at this level.
If you know for sure you’ll be responsible for paying taxes on your benefits then it might be easier to have them withdrawn from your benefit checks. This can be done by downloading IRS Form W-4V, Voluntary Withholding Request, or contact the IRS toll-free number 1-800-829-3676 to have it mailed to you.