How Social Security is taxed

By Erica Stark, Licensed Financial Advisor, Tax Specialist, Founder of TAPP Financial

Understanding how Social Security benefits are taxed plays a crucial role in retirement income. By knowing the rules and tapping into tax strategies, I enjoy helping retirees maximize their after-tax income and optimize their financial stability throughout the retirement years.

For many retirees, Social Security benefits form a crucial component of their income. However, it often surprises people that these benefits may be subject to federal income tax.

Social Security benefits include retirement, disability and survivor benefits. The tax implications, however, focus on retirement benefits received by individuals who have reached the eligibility age and are receiving payments.

Whether your Social Security benefits are taxable depends on your “combined income,” which is calculated as Adjusted Gross Income (AGI) + Nontaxable Interest + Half of Social Security Benefits.

To break this down further, Adjusted Gross Income (AGI) includes all taxable income sources such as wages, dividends and IRA distributions. Nontaxable interest from municipal bonds, for instance, is not subject to federal income tax. Half of Social Security benefits refers to 50% of the total annual Social Security benefits received.

The taxability of Social Security benefits also hinges on your filing status and combined income.

To minimize the tax impact of Social Security benefits, I often suggest strategies such as delaying benefits to increase the monthly payment and potentially reduce the portion subject to tax, spreading other sources of income to help keep your combined income within lower tax brackets, and optimizing tax-free income streams like Roth IRAs and municipal bonds that do not affect the taxability of your Social Security benefits.

TAPP Financial is located at 7003 Pearl Road, Suite 17B, in Middleburg Heights. Call 440-885-3133 or visit Tapp-Financial.com.