Before you claim Social Security, there are a few obvious questions to ask yourself.
You’ll want to know how much your benefit check is going to be, of course. You may also want to know whether you are being hit with any early filing penalties or earning any delayed retirement credits based on when you are retiring relative to your full retirement age.
However, while those questions are obvious ones asked by many seniors, there’s also something else you should look into that is often overlooked, but that could have a big impact on your retirement budget. Here’s what it is.
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Don’t forget to ask yourself this Social Security question before retiring
Before you retire, it’s important to find out whether you will owe taxes on your Social Security checks. While this question may not be on your radar, it should be. If you must give the IRS a cut of your benefits, this means you’ll have less money available to spend on other things.
It may come as a surprise that you have to pay taxes on benefits, since Social Security is an earned benefit. You’ve become eligible for it by paying into the system throughout your entire working life. However, reforms during the 1980s and 1990s introduced taxes on Social Security benefits for some retirees in an effort to shore up the program and fix its financial shortfalls.
When the laws introducing tax on Social Security were first passed, only a small percentage of wealthy retirees actually paid the tax. However, the thresholds when it kicks in were not indexed to inflation. As a result, around half of all retirees now lose some of their benefits to federal taxes, according to The Senior Citizens League. This is up from the 10% that was impacted when the tax was introduced.
Will you owe tax on your Social Security benefits?
So, will you owe taxes on Social Security benefits? It all depends on something called your provisional income. Provisional income is half of all Social Security benefits, all taxable income, and some non-taxable income.
If your provisional income is between $25,000 and $34,000 as a single tax filer, you will owe tax on up to 50% of your benefits. This includes income from things like 401(k) accounts and other retirement plans, as well as from other taxable and some non-taxable income sources. If your provisional income is above $34,000, you could owe tax on up to 85% of your benefits.
If you file your taxes as married filing jointly, you will owe tax on up to 50% of your benefits if your provisional income is between $32,000 and $44,000, and on up to 85% of your benefits above this threshold.
When your income is above these thresholds, you must prepare for the reality that you won’t get to keep all your Social Security money. Make sure your budget works, even after you pay your taxes, so you aren’t caught off guard and facing shortfalls as a retiree.
