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Unpleasant Tax Surprises: Social Security

Unpleasant Tax Surprises: Social Security

Ah, taxes, everyone’s favorite subject!  To be fair, I have friends who actually enjoy diving into tax tables and itemizing deductions, which is wonderful!  But that is not the majority of people I know. 

Our tax system is challenging.  Yet, we all must learn to navigate it, to some extent.  This is where “knowledge is power” and can help prevent headaches down the road for you.     

The Taxation of Social Security Benefits

“My Social Security benefit is taxed??”  This is a deflating realization for many people.  There is a common misunderstanding that Social Security is a tax-free benefit.  You turn it on, and the checks start coming in.  Not entirely.  If your only income is from Social Security, then yes, you may receive those benefits tax-free.  But I observe that these days, many people have more than one stream of retirement income.  This is a good thing!  But it does affect your Social Security benefit.

Here’s why: Social Security taxation is figured from your “combined income.”  This includes income from other sources, like a pension, part-time job, IRA, or other investments.  If your “combined income” is below certain thresholds, you may not be required to pay taxes on your Social Security benefit.  But those thresholds are pretty low, usually lower than most people desire for retirement income.  More info here.  

The good news is only up to 85% of your Social Security benefit may be subject to taxation.  While that still may be irksome, it’s not 100%.  And, as I mentioned earlier, if your income is below certain thresholds, you may be taxed on only 50% of your Social Security benefit, or possibly zero. 

What You Can Do

If you are just starting to receive your Social Security benefit (or you are considering it), it could be worth your while to check out the thresholds and think about what other retirement income you may be getting.  Plan to pay taxes on your benefit accordingly.  I usually advise clients to request the Social Security office withhold money for taxes and send it to the IRS on your behalf (which you can do when you first sign up, or later; more info here.  That way you (hopefully) don’t get a nasty surprise when you file your taxes.

Of course, these observations are made in general.  Please consult with a knowledgeable tax preparer or Certified Public Accountant about your unique situation.

Have you had an unpleasant tax surprise recently that you wish you had known about sooner?  Please let me know!  I love to hear about, and learn from, clients’ stories.

Shadowridge Asset Management, LLC does not offer tax planning or legal services but may provide references to accounting, tax services or legal providers. They may also work with your attorney or independent tax or legal advisor.