- Our Services
- Publications & Video
- Client Login
The Secret Behind Social Security Benefits: What reduces them? How are they taxed?Submitted by Townsend Asset Management Corp. on January 25th, 2017
One of the big questions as you begin the retirement process is when to start receiving your social security benefits. Or if you already receive them, how those benefits may be affected by other income. Individuals that are still working or receiving income from other sources like required minimum distributions (RMDs) from their retirement accounts may receive lower benefits, and/or incur tax on benefits received.
If you choose to take social security benefits prior to your full retirement age, they may be reduced as follows:
- If you are younger than the full retirement age in 2017 (sixty-six and two months), your benefits will be withheld in the amount of $1 for every $2 that you earn over $16,920.
- If you turn sixty-six and two months during 2017 and begin benefits prior to the date of your birthday, for every $3 that you earn over $44,880, $1 will be withheld until you reach full retirement age.
Note that the amount withheld will be added to your overall entitlement and distributed to you in the ensuing years.
If you received social security benefits in 2016, a portion of those benefits may be taxable on your 2016 tax return. There is a simple way to calculate what portion of your social security will be taxable. Add half of your net social security benefits to the rest of your net income, then compare it to the category you fall under given your filing status.
If you file your tax return as single, head of household, qualifying widow or widower with a dependent child or married filing separately where you lived apart from your spouse for the full year, the following applies:
- No tax - If you earned less than $25,000, then your benefits will not be taxed.
- 50% taxable – If your income was between $25,000 and $34,000, half of your benefits will be taxable.
- 85% taxable - If your income was higher than $34,000 then eighty-five percent of your benefits will be taxable.
If you are married filing jointly, you can use the formula described above to determine what percentage of benefits are taxable.
- No tax - If you are below $34,000, none of your benefits will be taxable.
- 50% taxable -If your income was between $34,000-$44,000, half of your benefits will be taxable.
- 85% taxable - If you earned above $44,000, eighty-five percent of your benefits are taxable.
If you file as married filing separately where you lived with your spouse during the year, 85% of your social security benefits will be taxable no matter the amount of your total income.
Bear in mind that this is a brief summary and your situation may vary according to your unique circumstances. For more in-depth information, we are here to help at Townsend Asset Management Corp.
Michael Solomon is a Tax and Financial Advisor at Townsend Asset Management Corp., a registered investment advisory firm in Raleigh, North Carolina offering comprehensive wealth management expertise to its clients. Email Michael@AssetMgr.com for information about financial and tax planning services.