Social security income is subject to taxation, but not everyone will have to pay taxes on their retirement income. Do you ask yourself, is my social security taxable? The answer is that it depends on the amount of your social security income and whether you have other sources of retirement income as well. If you do, chances are that you’ll owe taxes, which many retirees are surprised to learn.
Is My Social Security Taxable?
Here’s a quick way to see if your social security income is taxable:
- Figure out your gross income from your tax return
- Add back any tax-exempt interest earned
- Add one half of your annual social security income
Compare this figure to the following:
- If you are single, is the amount higher than $25,000?
- If you are married filing joint is the amount higher than $34,000?
If you answered ‘yes’ to either of the above, you may owe Social Security income tax. Next, you must figure out how much is taxable.
- If you are single, income between $25,000 and $34,000, 50% of your SSI is taxable.
- If you are single with income is above $34,000, 85% of your SSI is taxable
- If you are married filing joint with income between $32,000 and $44,000, 50% off your SSI is taxable
- If you are married filing joint with income over $44,000, 85% of your SSI is taxable
The Exempt Income
There may be one type of retirement income that you can exclude from your calculations when determining your Social Security Income tax and that’s Roth IRA income. If you have a Roth IRA, you’ve already paid taxes on the income since you contribute to it post-tax. In other words, you don’t have to include the Roth IRA distributions in your calculations. This is one way to avoid taxation on your Social Security income.
If you have a traditional IRA account consider converting to a Roth IRA account. You’ll pay the taxes the year in which you convert, but then you won’t pay them again. There are several benefits of having a Roth IRA account:
- You won’t be required to take minimum distributions at age 70 ½ like traditional IRAs require. This allows you to defer your withdrawals and avoid Social Security taxation.
- You can withdraw the funds during a year that you’ll have lower income and will stay below the threshold.
- You can withdraw just the right amount of funds each year that keeps you below the threshold, but still able to access both your Social Security income and your Roth IRA proceeds.
The good news is that 15% of every retiree’s Social Security income is tax-free. Only up to 85% of your SSI may be taxed, but many fall within the 50% tax bracket. Planning now for your retirement income can help you minimize your taxes and get the most out of your retirement income.