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Will Social Security Benefits Be Taxable?

Social Security is often a significant source of income for many retirees or people with disabilities. In some cases, it’s their primary source of income. But one aspect that’s often left out of the discussion is whether these benefits are taxable to the recipient. And yes, Social Security benefits are sometimes taxed. 

You may go several years without paying taxes on your benefits, but then your required minimum distribution age hits, and suddenly you find almost all of it now falls into the taxable column of your return. 

So how does it work?  

The amount of your Social Security benefits that will be taxed depends on a number of factors, most notably any non-Social Security income you may have. The IRS uses what it calls “combined income” to determine how much, if any, of your benefits are taxable. 

To figure out that “combined income,” here’s what you do: Take one half of the Social Security money paid during the year and then add that to any other income you had, which includes pensions, wages, interest, dividends and capital gains. If you’re married filing jointly, you need to add half of both of your total Social Security benefits. 

If that combined total comes to more than $25,000 as a single individual, or more than $32,000 as a married couple, then up to 50 percent of your Social Security benefits may be taxable.  

But of course, it doesn’t stop there.  

If your combined income adds up to more than $34,000 as a single individual, or more than $44,000 as a married couple filing jointly, then up to 85 percent of your Social Security benefits may be taxable.  

I should mention here that a handful of states also tax Social Security benefits. So depending on where you live, you may have to pay state income taxes on your benefits as well. 

Here’s the question now from a financial planning perspective: is there anything you can do to reduce or eliminate taxes on your benefits? 

To answer that question, you need to know that the real determining factor here is the other, non-Social Security income that you have. If your only income is Social Security, then you won’t owe any taxes. But as you throw in pensions, wages, capital gains, and distributions from IRAs and other retirement plans, the odds of your benefits being taxed go up pretty quickly. 

But one income source that does not count as “other income” is a qualified distributions from a Roth IRA. So having more money in Roths and less in traditional tax-deferred accounts gives you a lot more flexibility. You may be able to take just enough money from your taxable IRAs to stay under the standard deduction limits, and then use your Roth money to cover any shortfalls.  

This is where planning prior to taking your benefits becomes critical. Sometimes, doing Roth conversions before you reach RMD age, and before you begin taking Social Security, can help you build that Roth money and reduce your IRA balance enough to make a difference once RMDs and Social Security both kick in. 

Of course, sometimes there’s nothing you can do about it. If your other income is simply too high, then you may just have to count your blessings and pay the taxes. But it’s important to know that by strategizing, you may be able to keep some or all of your benefits out of that taxable column. 

We plan for these situations every single day with our clients at Lucia Capital Group. How can we help you the most? Just give us a call! 

Important Information:

The information provided should not be considered specific tax, legal, or investment advice and is not specific to any individual’s personal circumstances. Each taxpayer should seek independent advice from a tax professional based on his or her individual circumstances.

You should always seek counsel of the appropriate advisor prior to making any investment decision. All investments are subject to risk including the loss of principal. This material was gathered from sources believed to be reliable, however, its accuracy cannot be guaranteed.

No client or prospective client should assume that this information, or any component thereof, serves as the receipt of, or a substitute for, personalized advice from Lucia Capital Group or from any other investment professional.

The information provided is based on current laws, which are subject to change at any time. Lucia Capital Group is not affiliated with or endorsed by the Social Security Administration or any government agency.

Social Security rules can be complex. For more information about Social Security benefits, visit the SSA website at www.ssa.gov, or call (800) 772-1213 to speak with an SSA representative.

Traditional IRA account owners have considerations to make before performing a Roth IRA conversion. These primarily include income tax consequences on the converted amount in the year of conversion, withdrawal limitations from a Roth IRA, and income limitations for future contributions to a Roth IRA. In addition, if you are required to take a required minimum distribution (RMD) in the year you convert, you must do so before converting to a Roth IRA.

IRA withdrawals will be taxed at ordinary income rates. Withdrawals prior to age 59½ may also be subject to a 10% penalty tax.

Roth IRA distributions of principal from a Roth IRA are tax-free; however, any earnings will be taxed at ordinary income rates and a 10% penalty tax will apply if withdrawn prior to age 59½ or within five years of the date the Roth IRA was established, whichever is longer.

Rick Plum is a registered representative with, and securities and advisory services offered through LPL Financial, a registered investment advisor and member FINRA/SIPC. The investment professionals are affiliated with LPL Financial and are conducting business using the name Lucia Capital Group, a separate entity from LPL Financial.

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