Social Security Taxation
By: Matt Rose, CFP®, Financial Advisor
Social Security income is designed to replace a percentage of a worker’s pre-retirement income in order to get them through retirement securely. While the significance of Social Security may differ with each retiree’s circumstances, it is nevertheless important to understand how this benefit is taxed. In this article, we will explore what makes Social Security taxable and what amount you can expect to pay taxes on.
In order to see if you will owe taxes on your Social Security, the IRS recommends taking one-half of your benefit and adding that amount to all your other retirement income, including any tax-exempt interest. This makes up your “combined income” which is calculated as:
½ of Social Security benefits + Adjusted Gross Income (AGI) + Nontaxable Interest
If your amount of combined income is above what the IRS calls the “base amount”, then you will owe tax on some portion of your benefit. For 2023, the base amount is $32,000 for joint filers and $25,000 for single and head-of-household filers.
The amount of Social Security that will be considered taxable depends on your total retirement income. You will never pay taxes on more than 85% of your Social Security income. Here is a helpful chart summarizing what percent of your benefit you should expect to pay taxes on given your combined retirement income:
|Combined Income - Single or Head-of-Household Filers||Combined Income - Married Filing Jointly||% of Taxable Social Security Benefits|
|$0 - $25,000 (base)||$0 - $32,000 (base)||0%|
|Between $25,000 - $34,000||Between $32,000 - $44,000||50%|
|More than $34,000||More than $44,000||85%|
It should be noted that states have the right to tax Social Security. However, Kentucky currently does not.
At MCF, we have you covered in every area of your financial life. We know there are many complexities regarding taxes in retirement. Please reach out to us if you have any questions or would like to discuss in greater detail.
Source: SSA Gov Site
IMPORTANT DISCLOSURE INFORMATION
MCF Advisors, LLC (“MCF”) is a SEC registered investment adviser. Registration as an investment adviser does not imply a certain level of skill or training. The oral and written communications of an adviser provide you with information about which you determine to hire or retain an adviser. More information about the adviser can also be found by visiting: https://adviserinfo.sec.gov/. This is not intended as an offer or solicitation with respect to the purchase or sale of any security. MCF may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements. Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by MCF), or any non-investment related content, made reference to directly or indirectly in this blog/newsletter will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog/newsletter serves as the receipt of, or as a substitute for, personalized investment advice from MCF. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. MCF is neither a law firm nor a certified public accounting firm and no portion of this content should be construed as legal or accounting advice. A copy of MCF’s current written disclosure statement and customer relationship summary (“Form CRS”) discussing our advisory services and fees continues to remain available upon request. The scope of the services to be provided depends upon the needs of the client and the terms of the engagement. If you are a MCF client, please remember to contact MCF, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services.