A “Costly Retirement Surprise” In Retirement

File this one under “what you don’t know can hurt you.”

Many clients are surprised to learn that they are likely to owe taxes on their Social Security income. Social Security benefits are tax-free only to recipients at lower income levels.

Once your income exceeds a certain amount, the IRS starts assessing income tax on up to 85% of benefits.   For example, married couples with combined income of between $32,000 and $44,000 will be taxed on up to 50% of benefits. If your combined income exceeds $44,000 you will be taxed on 85% of benefits.

And here’s the kicker. Your “combined income” is defined as adjusted gross income on your tax return (such as wages, self-employment, interest, dividends and other taxable income) + non-taxable interest (such as tax-exempt income from municipal bonds) + 1/2 of your combined Social Security benefits.

That mean that a couple receiving two Social Security benefits valued at $20,000 each, plus a $15,000 pension, $5,000 of CD income and $5,000 of taxable dividends will likely be looking at an extra $1,000 in taxes, due to their monthly Social Security checks.

So while the Social Security Administration says the taxes apply only to people with “significant other income,” it’s hard to make the case that $25,000 of income qualifies as “significant,” when it’s used to support two people given the housing, medical and other costs that retirees confront today.

Kiplinger Personal Finance magazine calls Social Security taxes one of five “Costly Retirement Surprises” (check out all five on the Kiplinger website). Now that you know the rules, don’t be shocked when Uncle Sam knocks on your door wanting his cut of your monthly benefit.

About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!


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