Retirement has a wider variety of possibilities than there are flavors at Baskin Robbins, by which I mean it’s entirely different from person to person. However, no matter what direction you take your retirement, whether you decide to travel the world, get a new hobby, or just enjoy spending lots of time with family and friends, the one thing that does actually stay the same for all people is that having less financial stress will vastly improve your life.
One of the biggest assets our nation provides for those of retirement age is Social Security. If you have a sizable nest egg saved back, then this program will provide an excellent supplement that will enable you to help tackle any unforeseen expenses that tend to pop up in life. However, just like with other streams of income you have, there are tax implications you need to know about.
First off, you need to know which states the nation actually have tax rules for Social Security. Thankfully, more and more states are working toward tossing out laws for taxing this kind of income. Unfortunately, there are still ten states where you might be subjected to paying taxes on your benefit:
- Colorado
- Connecticut
- Kansas
- Minnesota
- Montana
- New Mexico
- Rhode Island
- Utah
- Vermont
- West Virginia
So if you call one of these states home and are a recipient of Social Security benefits, you might want to check the rules to ensure you are in compliance.
According to the Motley Fool:
For example, Connecticut recipients can deduct 100% of their federally taxable Social Security income if their adjusted gross income (AGI) is below $75,000 for single filers and $100,000 for married couples filing jointly; in Kansas, an AGI above $75,000 means you’re subjected to taxes regardless of your filing status; and in Utah, you’ll pay a flat 4.65% tax rate applied to all income, not just Social Security.
Federal tax rules on your Social Security benefits are unavoidable, regardless of your state’s specific rules. However, the IRS doesn’t use your earnings directly to determine your tax status; they use your “combined income.” Your combined income includes your AGI, any income from tax-exempt municipal bonds, and half of your annual Social Security earnings.
For example, with an AGI of $60,000, Social Security benefits totaling $24,000 annually, and $1,000 from tax-exempt bond interest, the combined income would be $73,000 ($60,000 + $12,000 + $1,000).
After you get that number, this is how much of the benefit you draw is eligible for federal taxes based on your filing status and combined income:
Before you freak out and have some sort of medical emergency, keep in mind that the percentages in the table above are simply how much of your income is eligible to be added to your taxable income. It’s not how much your benefits will actually be taxed.
“For instance, if you’re single and have a combined income of $40,000, Social Security won’t tax 85% of your benefits. Instead, up to 85% ($34,000) can be added to your taxable income for the year. The IRS will then tax it at your typical income tax rate. If you’re in the 22% tax bracket, you would owe 22% on the taxable portion of Social Security benefits,” the Motley Fool wrote.
Just like with the vast majority of things concerning Social Security, tax rules are subject to changes from year-to-year. Always stay well informed about the rules so you can protect your finances.