Dec 12, 2016
It depends. If your income exceeds certain tax law thresholds, a portion of your Social Security retirement benefits will be subject to federal income taxes.
The IRS uses your “provisional income” to determine the percentage of benefits subject to tax. Generally, provisional income includes your modified adjusted gross income plus tax-exempt interest and half of the Social Security benefits you received during the year.
Individuals with provisional income between $25,000 and $34,000 and married couples (filing jointly) with provisional income between $32,000 and $44,000 are taxed on up to 50% of their benefits. And up to 85% of benefits are taxable for individuals with provisional income over $34,000 and married couples with provisional income over $44,000.
As these thresholds are not adjusted for inflation, more taxpayers tend to be affected as overall income levels increase. For example, according to the IRS, the number of taxpayers with taxable benefits in 2012 was about one million more than in 2011.
Minimizing the Tax Bite
If you are collecting Social Security, be aware that certain actions, such as taking a large retirement account distribution or recognizing capital gain from the sale of a second home, could push your provisional income past a threshold and/or increase your overall tax rate.
To help lessen the impact of taxes on your benefits, you might consider:
- Structuring a vacation home sale or traditional individual retirement account (IRA) distribution so that income is received over more than one year
- Liquidating assets in a taxable investment account rather than a retirement account if it will mean recognizing only a small capital gain or you have capital losses on other transactions that would offset the gain