Can I Keep All of My $2,700 Monthly Social Security Benefit, or Will Taxes Cut In?
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Social Security plays a critical role in the retirement plans of millions of Americans, but how these benefits are taxed is sometimes overlooked. If you collect $2,700 per month in Social Security benefits, your check is well above the average retirement benefit of approximately $1,800 per month and it could mean that you’ll owe taxes on this money. However, there are ways to potentially reduce your tax liability. Consider working with a financial advisor to create a comprehensive financial plan for retirement that accounts for your Social Security benefits and tax situation.
Social Security benefit taxes are calculated based on “combined income.” As your combined income climbs, you’ll potentially owe taxes on a larger percentage of your benefits. Here’s how combined income gets calculated:
So, for example, say that you withdraw $50,000 from your 401(k) and collect $40,000 in annual Social Security benefits. Your combined income would be $70,000 ($50,000 + $40,000/2).
From there, the IRS uses the following income tiers to tax the benefits of people who file their taxes as individuals:
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Combined income below 25,000: Benefits are not taxable
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Combined income between $25,000 and $34,000: Up to 50% of benefits are taxable
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Combined income above $34,000: Up to 85% of benefits are taxable
If you file a joint return with your spouse, the following income tiers will determine the taxability of your Social Security:
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Combined income below $32,000: Benefits are not taxables
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Combined income between $32,000 and $44,000: Up to 50% of benefits are taxable
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Combined income above $44,000: Up to 85% of benefits are taxable
Note that these are not the tax rates. Rather, this means that up to 50% or up to 85% of your Social Security benefits are subject to your ordinary income tax rates. But if you need help assessing your tax liability, consider speaking with a financial advisor with tax expertise.
As we mentioned above, the more combined income you have, the more of your benefits can potentially be taxed. If you collect $2,700 per month, that’s $32,400 per year in Social Security benefits, which gives you a starting combined income of $16,200 ($32,400/2). If Social Security were your sole source of income, you wouldn’t owe any taxes on your benefits.
From there, taxes will apply depending on your other sources of income. For example, say that you withdraw $50,000 from your 401(k). That would make your combined income $66,200 (50,000+16,200), meaning up to 85% of your benefits – $27,540 – would be taxable.
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