Retirement is something many of us have looked forward to for some time. Whether in our forties or fifties or sixties, it is likely we have put something aside for that day and are almost surely counting on Social Security as a part of the picture. Naturally, Social Security is only available once we reach a more “normal” retirement age, which is at least 62 for most of us.
You probably know that if you wait for what is called your full retirement age (for Social Security purposes) you will get a larger monthly check than if you take it right away when first eligible. And you likely know as well that if you wait even longer, to age 70, to take payments, the check is larger still. However, before you get too excited about that check and what it may mean to your retirement, let’s think about taxes.
You’ve paid your taxes for decades and now you’ve finally reached retirement and Social Security. The payment sounds good to you when you talk to the folks at Social Security and you think about spending it in retirement. But did you know that some of those benefits may be subject to income tax? As much as 85% of a portion of your benefit may be included in your taxable income if your income is high enough.
The threshold may be lower than you think. If you have a pension, interest or dividends or perhaps income from IRA or other qualified plan distributions such as RMDs, those cash flows may be enough to expose your benefits to income taxation. Singles with provisional income (including only half of the Social Security benefits received) over $25,000 and below $34,000 will see fifty percent of their benefits, up to $4,500, added to their taxable income. If income and benefits are higher, then 85% of those additional dollars in benefits will be taxable income.
Marrieds see the taxation of benefits kick in with provisional income over $32,000 and below $44,000 (with up to $6,000 in benefits being included in taxable income) and where income is higher, then 85% of the benefits above $12,000 are included in taxable income. This can be painful, especially since many folks have income in retirement above these minimum thresholds. Naturally the inclusion of a portion of your benefits in taxable income will mean more taxes due and a need for withholding or estimated payments. Don’t get caught unaware and be sure to plan ahead for this additional tax.