Social Security Taxation
By: Matt Rose, CFP®, Financial Advisor
Social Security income is designed to replace a percentage of a worker’s pre-retirement income in order to get them through retirement securely. While the significance of Social Security may differ with each retiree’s circumstances, it is nevertheless important to understand how this benefit is taxed. In this article, we will explore what makes Social Security taxable and what amount you can expect to pay taxes on.
In order to see if you will owe taxes on your Social Security, the IRS recommends taking one-half of your benefit and adding that amount to all your other retirement income, including any tax-exempt interest. This makes up your “combined income” which is calculated as:
½ of Social Security benefits + Adjusted Gross Income (AGI) + Nontaxable Interest
If your amount of combined income is above what the IRS calls the “base amount”, then you will owe tax on some portion of your benefit. For 2023, the base amount is $32,000 for joint filers and $25,000 for single and head-of-household filers.
The amount of Social Security that will be considered taxable depends on your total retirement income. You will never pay taxes on more than 85% of your Social Security income. Here is a helpful chart summarizing what percent of your benefit you should expect to pay taxes on given your combined retirement income:
| Combined Income - Single or Head-of-Household Filers | Combined Income - Married Filing Jointly | % of Taxable Social Security Benefits |
|---|---|---|
| $0 - $25,000 (base) | $0 - $32,000 (base) | 0% |
| Between $25,000 - $34,000 | Between $32,000 - $44,000 | 50% |
| More than $34,000 | More than $44,000 | 85% |
It should be noted that states have the right to tax Social Security. However, Kentucky currently does not.
At MCF, we have you covered in every area of your financial life. We know there are many complexities regarding taxes in retirement. Please reach out to us if you have any questions or would like to discuss in greater detail.
Source: SSA Gov Site
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