Many retirees are surprised to learn that their Social Security is taxable, and the way it’s calculated often pushes the tax bill much higher than they expected.
We’ve seen this catch families off guard again and again.
Here’s what’s actually happening.
The IRS uses something called provisional income to determine how much of your Social Security is taxable.
That’s your adjusted gross income, plus any nontaxable interest, plus half of your Social Security benefits.
If you’re single and that number exceeds $34,000, up to 85% of your benefits become taxable. For married couples filing jointly, the higher threshold is $44,000.
These thresholds have not been adjusted for inflation in decades, which means more retirees get pulled into taxation every year without their situation really changing.
The problem compounds quickly.
Every dollar you withdraw from a traditional IRA or 401(k) increases provisional income. That can cause more of your Social Security to become taxable, which increases adjusted gross income even further.
In some ranges, a single withdrawal dollar can effectively trigger tax on far more than a dollar of income, and higher adjusted gross income can also raise future Medicare premiums through income-based surcharges.
There are planning strategies that can reduce this exposure, including Roth conversions before claiming benefits, qualified charitable distributions after age 70½, and coordinating withdrawals intentionally instead of reactively.
The key is understanding the interaction before it shows up on your tax return.
If you have questions about how Social Security taxation may affect you, schedule a call using the link below. Our advisors are always happy to walk through it with you.
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Bautis Financial LLC is a registered investment advisor. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial advisor and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.
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