Step 8: Understand How Taxes Can Affect Your Benefits

Here’s another surprise for many new retirees: your Social Security benefits might be taxable. Whether you have to pay federal income tax on your benefits depends on your total income.

The IRS uses a formula called “combined income” (sometimes called “provisional income”) to figure this out. It’s a simple calculation:

Combined Income = Your Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Your Social Security Benefits

Adjusted Gross Income is the number you find on your tax form, and it includes things like wages, pension payments, and withdrawals from traditional 401(k)s or IRAs. Once you have your combined income number, you compare it to the following thresholds:

For an individual:

If your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.

If your combined income is more than $34,000, up to 85% of your benefits may be taxable.

For married couples filing jointly:

If your combined income is between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.

If your combined income is more than $44,000, up to 85% of your benefits may be taxable.

It’s important to know that you’ll never pay taxes on more than 85% of your Social Security benefits. Planning for these taxes is a key part of managing your retirement budget. For example, a large withdrawal from a traditional IRA could push your combined income over the threshold for a given year, resulting in a surprise tax bill. Understanding these rules can help you make smarter decisions about when and how you access your other retirement funds.

For official details, it’s always best to consult the Internal Revenue Service (IRS) website or a qualified tax professional.