How Social Security is Being Taxed

Let’s talk about how your Social Security is being taxed. So essentially you’re going to take half of your Social Security plus all other taxable income is going to equal your modified adjusted income or MAGI. So if you’re a single tax payer and you run through that equation and you reach the perimeters of $25K to $34K for your MAGI, then 50% of your Social Security is taxable. If you go above $34K now all of a sudden 85% of your Social Security is considered taxable income. For a married couple those numbers are $32K to $44K, 50% of your Social Security is taxable. And then if you go north of $44K then 85% of your Social Security is taxable. So again, you’re going to take your taxable income, plus your taxable Social Security to determine your total taxable income. Now with total taxable income you can then determine what tax bracket that you fall into. But you don’t want to forget that you have your standard deduction that’s going to be deducted from that figure. So let’s walk through an example. Let’s say you have a $20K IRA and $24K of Social Security. So half of $24K of your Social Security is going to be $12K, plus $20K of your IRA equals $32K. So if you’re married, then none of your Social Security is going to be taxable. So you’re left with a $20K IRA. The standard deduction right now is essentially close to about $26K. So that’s going to offset all of this income. So in this example if there’s maybe $44K of income with $32K of MAGI, but $0 is taxable, now that’s where you have an opportunity to start looking at what are some ways that you should be taking advantage of the current tax brackets and try to optimize those? So understanding exactly how Social Security is taxed and what role it plays within your overall retirement plan can be valuable because there may be opportunities where you could draw additional funds from an IRA either as withdrawals or potentially as Roth conversions to optimize your current tax bracket. Here at Centennial Wealth Advisory looking at that long-term plan for not just for your income, but also for your tax plan and also Social Security planning. When to begin Social Security is vital. So we encourage you to give us a call. We’d love the opportunity to sit down with you for a no cost, no obligation visit to dive into this a bit deeper.