In light of a recent Wealth Management Workshop about Social Security that we hosted for our clients, I have found it helpful to review with people the potential taxation of their Social Security benefits in retirement. Many people do not realize how taxation will affect them in retirement, and consequently fail to plan for it properly.
The IRS looks at your “combined income” to determine the taxability of your Social Security benefit. Combined income is calculated by adding your Adjusted Gross Income with any non-taxable interest (such as Muni Bond interest), plus half of your Social Security Benefits. The equation looks like this:
AGI + Non-taxable Interest + ½ Social Security Benefits = Combined Income
If your “combined income” is between $25K and $34K for a single person, or $32K and $44K for a couple, 50% of your Social Security benefit will be taxable.
If your “combined income” is over 34K for a single person, or $44k for a couple, 85% of your Social Security Benefit will be taxable.
As you can see this can become quite significant and should be weighed when planning for retirement income.
