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Retirement income, including Social Security, is treated differently than wage and investment income for tax purposes. The IRS has its own criteria for taxation of Social Security benefits, and 13 states do as well. Here's an overview of the income taxes you may have to pay on your Social Security benefits, and what it could mean to you as a retiree.
Social Security taxes at the federal levelIn general, you'll only have to pay federal income taxes on your Social Security benefits if you have a substantial amount of income from other sources, such as wages from a job, income from a business you own, or investment/dividend income.
When determining how much of your Social Security income may be subject to income tax, the IRS uses your "combined income," which consists of your adjusted gross income (AGI), nontaxable interest, and half of your Social Security benefits.
For individual (single) tax filers, if your combined income is between $25,000 and $34,000, 50% of your Social Security benefits may be subject to income tax. If your combined income is more than $34,000, up to 85% of your benefits could be taxable.
For joint filers, the income thresholds increase to a range of $32,000 to $44,000 for 50% taxation, and $44,000 and above for 85% taxation. Under no circumstances is more than 85% of your Social Security benefit subject to taxation, no matter how much income you have.
13 states tax Social Security benefitsIn addition to the federal taxes you may have to pay on Social Security benefits, there are 13 states that also tax Social Security. However, the exemptions vary considerably from state to state, so here's a rundown of which states tax benefits, and who has to pay.
What it could mean to youAs you can imagine, the amount of income tax you'll have to pay can vary tremendously based on the amount of your Social Security benefits, your other income, and the state you live in.
A retired couple whose only source of income is $30,000 in Social Security wouldn't have to pay taxes at all, but a couple with $30,000 in SS income and $100,000 in AGI who resides in Connecticut would have to pay federal income tax at their marginal tax rate on 85% of their SS income as well as state income taxes.
Consider the big pictureAs a final thought, it's important to keep in mind that taxes on Social Security benefits are just one piece of the puzzle. Some states that tax Social Security benefits are actually pretty tax-friendly places to retire, such as Colorado. And, some states that don't tax Social Security at all, like New York and New Jersey, are still among the most taxing places to live. So, be sure to consider the big picture when it comes to the taxes you could face in retirement.
The article Will You Pay Taxes on Your Social Security Benefits? originally appeared on Fool.com.
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