You may not know it, but Social Security income is taxed! However, your tax burden isn’t simply a gross income tax, and there are unique factors that dictate your tax rate and overall tax liability.
First, not all Social Security income is taxed. Only a portion of your benefits may be subject to tax, depending on your taxable and overall supplemental income and filing status. The amount of your Social Security benefits that are subject to tax is determined by what is known as the “combined income” formula. This formula considers your adjusted gross income, tax-exempt interest, and half of your Social Security benefits. If your combined income is below a certain threshold, none of your benefits will be taxed. If it is above the threshold, a portion of your benefits may be taxed at either 50% or 85%.
The thresholds for taxation of Social Security benefits vary depending on your filing status. For single filers, the threshold for the 50% tax rate is $25,000 and the threshold for the 85% tax rate is $34,000. For married couples filing jointly, the thresholds are $32,000 and $44,000, respectively. For married individuals filing separately, the thresholds are lower at $25,000 and $34,000.
It’s important to note that the combined income formula only applies to federal taxes. Some states also tax Social Security benefits, but the rules for taxation vary from state to state. In some states, all Social Security benefits are exempt from state tax, while in others, the same combined income formula used for federal taxes is applied.
Overall, your tax burden on Social Security income will depend on your combined income, filing status, and state of residence. It’s a good idea to consult with a tax professional or use tax preparation software to determine your tax liability on Social Security benefits.
A financial professional can help you navigate these nuanced tax structures in addition to fitting your unique financial situation into a tax and Social Security strategy that works for you. Contact us at (540) 720-5656 to get started with a financial professional.
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Amy Anderson joined the ILG Financial team in 2023 as the client relations coordinator. Her responsibilities include scheduling of appointments, annual check-up notifications, and annuity and required minimum distribution assistance. She is a graduate of Harding University with a degree in Computer Information Systems. Amy and her husband have two children and she enjoys reading, crocheting, music and spending time with her family.
Chase Lopez joined the ILG Financial team in 2020 as an advisor. Chase is a 2016 James Madison University graduate with a degree in management. Chase has been trained under the tutelage of Dave Lopez, who is not only the founder and managing member of ILG Financial, but also is Chase’s uncle and godfather. He also enjoys working alongside his cousin, Megan, who is Dave’s daughter. Chase, as a fiduciary, believes in putting his clients interests first, and building out plans for his clients where they can have a happy and fruitful retirement. He married his beautiful wife in February 2022 and both use most of their free time chasing around their little pup, Aurora.
Jessica Carson joined the ILG Financial team in 2018 as an agent. Jessica and her husband have four children, two dogs, 3 barn cats, 5 chickens, and three parakeets. She indeed loves her children and pets! When not at work, Jessica enjoys playing the piano and cello as well as traveling and spending time outside with her family, hiking, fishing, and boating.
Terri Center joined the ILG Financial team in 2019 as client services manager. She handles client records, application processing, and gathering information to provide a professional and friendly experience with all of our clients. Terri is a graduate of Oakland University. She is married and has two children. She enjoys hiking, family time, and puzzle challenging video games. She also likes to share her creativity in her canvas paintings and sewing projects.
Megan Jones joined the ILG Financial team in 2020 as marketing director. Megan and her husband live in Fredericksburg, VA with their German Short Haired Pointer, Gus. Megan is a graduate of Longwood University and holds a degree in communications. Megan is the oldest of Dave Lopez’s three children and not only enjoys working alongside her father, but also with her cousin, Chase, who joined the ILG Financial team in 2020 as an advisor. When not at work, Megan enjoys sitting on the back porch with family and friends enjoying food and music.