Whether you’re close to retirement or already there, there are things you may already know about receiving Social Security. You may know that, in most cases, you will need to be at least 62 before you can start collecting. You may know that, if you wait, your benefits will increase. And you may even know that you can delay taking Social Security until you’re age 70 or even later.
Sounds simple enough. But there are other rules regarding Social Security benefits, especially when it comes to taxation, that are more complex and often confusing. As a Modera advisor and Certified Public Accountant, I help many clients who are near or at retirement age to understand those laws so they can try to maximize their benefits while minimizing their taxes.
Here are some questions and issues that arise:
Are Social Security benefits tax-free?
It depends. You may pay nothing in federal taxes on your Social Security income, or you could be taxed on up to 85% of that income.
Here’s the general rule of thumb regarding federal taxation on Social Security:
If your only income is Social Security, your benefits will likely not be taxed.
If you’re single and your provisional income is below $25,000 your benefits will not be taxed.
If you’re married and file your income taxes jointly and your provisional household income is below $32,000, your benefits will not be taxed.
What is provisional income?
It’s the total amount of wages, taxable and nontaxable interest, dividends, pensions, self- employment and other taxable income plus half of your annual Social Security benefits. This may include distributions you’re taking from your Individual Retirement Accounts and/or 401K.
If I have provisional income, how much of my Social Security benefits will be taxed?
If you’re single and your provisional income is between $25,000 – $34,000, then up to 50% of your Social Security is taxed.
If the single provisional income is over $34,000, then up to 85% of your Social Security is taxed.
If you’re married filing jointly and your provisional income is between $32,000 – $44,000, then up to 50% of your Social Security is taxed.
If the married filing jointly provisional income is more than $44,000, then up to 85% of your Social Security is taxed.
Should I wait to collect Social Security until I stop working?
That’s often a good strategy. If you’re working and collecting Social Security, you could have a larger tax liability than you may have realized. For many people who can afford it, it may be more prudent to delay taking Social Security payments for as long as you can. Also, if you start your Social Security benefits before reaching your full retirement age and you make over a certain threshold, you may be required to pay back the benefits you received.
Do I have to start collecting Social Security by age 70?
You do not. But your benefit will not increase if you wait longer.
I understand my state doesn’t tax Social Security benefits, so this doesn’t concern me, correct?
Thirty-seven states do not tax social security income, while 13 states do under certain circumstances. However, you may be taxed at the federal level. So, if your state (see below) does tax Social Security, you could have additional liability.
The states that do tax Social Security benefits are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.
If I’m already collecting Social Security, can I pause my benefits until later to avoid paying more taxes that I need to?
It may be possible, but there are pros and cons to doing so. If this is a strategy you’re considering, you should consult with a financial advisor who understands Social Security laws.
I thought by the time I collected Social Security my tax situation would be simpler.
For many people that is a reality. But for some people, Social Security income can contribute to the complexity of your tax situation. And, the laws can change frequently. What’s more, many financial professionals are not familiar with all the tax laws and may not be able to adequately advise their clients about the best strategies for the preservation of their retirement income.
Why is Modera different?
Modera has advisors that are also CPAs with wide-ranging experience in this arena. We carefully examine every aspect of our clients’ financial life in order to advise you of strategies that we believe will help you to avoid paying unnecessary taxes. Whether your retirement is many years away, on the horizon, or you’re already there, we’re here to help. To discuss your Social Security situation, please contact us.
Modera Wealth Management, LLC (“Modera”) is an SEC-registered investment advisor with places of business in Massachusetts, New Jersey, North Carolina, Georgia and Florida. Modera may only transact business in those states in which it is registered or qualifies for an exemption or exclusion from registration requirements. For information pertaining to our registration status, fees and services, please contact us or refer to the Investment Adviser Public Disclosure web site (www.adviserinfo.sec.gov) to obtain a copy of our disclosure statement set forth in Form ADV Part 2A. Please read the disclosure statement carefully before you invest or send money.
This article is limited to the dissemination of general information about Modera’s investment advisory and financial planning services that is not suitable for everyone. Nothing herein should be interpreted or construed as investment advice nor as legal, tax or accounting advice nor as personalized financial planning, tax planning or wealth management advice. For legal, tax and accounting-related matters, we recommend you seek the advice of a qualified attorney or accountant. This article is not a substitute for personalized investment or financial planning from Modera. There is no guarantee that the views and opinions expressed herein will come to pass, and the information herein should not be considered a solicitation to engage in a particular investment or financial planning strategy. The statements, information and opinions expressed in this article are subject to change without notice.
Investing in the markets involves gains and losses and may not be suitable for all investors and should not be considered a solicitation to buy or sell any security or to engage in a particular investment or financial planning strategy. Individual client asset allocations and investment strategies differ based on varying degrees of diversification and other factors. Diversification does not guarantee a profit or guarantee against a loss.