It’s a question we hear from our clients frequently. As they approach retirement, some seniors have always assumed that their Social Security benefits will be tax-free – but will they be? The answer depends on several factors, but odds are – if you’re approaching the time when you will begin drawing benefits – you will end up paying taxes on at least some of that income.
“It used to be so simple,” says the influential financial website Kiplinger. “Social Security benefits were tax-free. Period.” Not anymore. Over the years, as part of a plan to preserve Social Security, “Congress decided to tax up to 50% of benefits. Later, lawmakers decided to tax up to 85%, with the extra revenue going to shore up Medicare.” Today many if not most retirees with moderate or higher incomes will find their benefits taxed. Depending on where you live, your home state may even want their piece of the pie as well (not in Washington where – at least for now – we do not pay state income tax) although most states still leave Social Security earnings untouched.
A few months ago we found this report from Kiplinger that calls taxes on Social Security “a costly retirement surprise.” It was originally written a few years ago but updated earlier this year, and it explains in detail who will pay income tax on Social Security benefits, along with ways to minimize your tax exposure. Kiplinger states that “about 25 million Americans pay income taxes on their Social Security benefits – a surprise for many seniors who were planning on a source of tax-free income.” Depending on their earnings, the article reports, Social Security recipients could pay taxes on up to 50% of their benefits – or for some even up to 85%.
We won’t go into unnecessary detail, but here at AgingOptions we will gladly meet with you individually and help you evaluate your own personal situation. Still, one basic question retirees frequently ask is what the earning threshold is where taxes begin. The answer isn’t quite so simple. Kiplinger says, “The first step is to compute your ‘provisional income,’ which is basically your adjusted gross income (not counting any Social Security benefits) plus any tax-exempt interest and 50% of your benefits.” Once you’ve calculated that figure, according to Kiplinger, “Your benefits are totally tax free if your provisional income is less than $25,000.” That’s for single or head-of-household tax returns. If you file a joint return, that threshold rises to $32,000. Above that and chances are the IRS will levy taxes on some of your benefits.
If you do have to pay taxes, Social Security will withhold payments from your check if you desire. That saves you having to make quarterly payments. And, says Kiplinger, if you use tax software, most of the programs will make the Social Security calculation automatically.
Protecting your assets in retirement is vitally important, and that requires a realistic assessment of all your sources of income. One of the surest ways to maintain your independence and avoid becoming a burden to your loved ones is to make all your retirement plans carefully. While finances are a vital component of a good plan, there are other considerations you must take into account after ensuring that your financial resources are carefully and realistically allocated. Have you considered all your various housing options to plan where and how you’ll live? Are your legal affairs and all necessary documents up to date and complete? Are you thinking ahead to handle your health care needs as you age? Are your family members fully informed about, and supportive of, your wishes in retirement?
Here at AgingOptions we work with our clients to weave all five of these elements into a comprehensive plan – called a LifePlan. With your LifePlan in place you can face retirement knowing you’ll be able to protect your assets as you age, avoid becoming a burden to your loved ones, and also avoid being forced into institutional care against your wishes.
Where do you begin? We invite you to start by attending a free LifePlanning Seminar where we’ll provide you with helpful information about all these aspects to your retirement plan. We guarantee this will be a few hours very well spent. Click on the Upcoming Events tab on this website, and you’ll see all the upcoming dates, times and locations – you can either register online or contact us during business hours. But don’t delay, because these popular seminars fill up fast. It will be a pleasure meeting you at a LifePlanning Seminar in the near future.
(Originally reported at www.kiplinger.com)
