Is Social Security Considered Retirement Income for Tax Purposes?

Yes, Social Security is taxed as income for retirees – if the retiree’s combined income meets the minimum requirements. Combined income is your adjusted gross income (AGI) and nontaxable interest combined with half of your Social Security benefits.

Individual filers with a combined income over $25,000 to $34,000 or joint filers with a combined income of $32,000 to $44,000 will have to pay income tax on up to 50 percent of their benefits. Single filers with a combined income over $34,000 or joint filers with a combined income over $44,000 may need to pay taxes on up to 85 percent of their benefits.

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You can request withholding through the SSA to make the process easier. Social Security beneficiaries should receive a copy of their SSA-1099 every January, but you can also request a copy through the Social Security Administration’s website.

Marginal tax rates can hit retirees particularly hard as they reach the taxable income thresholds. If you’re on the edge of either the 50 percent or 85 percent threshold, it may be in your best interest to speak with a financial advisor or professional tax preparer for guidance.

What If You Have a Roth IRA?

Unlike traditional IRAs, Roth IRAs are funded with after-tax dollars, meaning they aren’t taxed as income when they’re withdrawn and not included in your combined income calculation. Whether it makes sense to convert a traditional IRA into a Roth IRA in retirement and take the one-time tax hit depends on the unique circumstances of your income and financial situation. It’s likely in your best interest to discuss this and all your other options with experienced financial planners and tax preparers to learn more.

Should You Continue Working After Beginning to Receive Your Social Security Benefits?

This can be a tough question for many single filers and couples, especially given how combined income is calculated. An important factor to consider is when you begin taking benefits. Doing so before you reach full retirement age can have consequences, but it still might be the preferred choice for some workers and retirees.

The Social Security Administration considers you retired once you begin receiving your SS benefits. People who begin collecting their benefits prior to reaching full retirement age can potentially receive a reduced benefit amount if their annual earnings exceed the limit set by the SSA.

The reduced benefit amount varies depending on how early you begin taking SS. The minimum age to start receiving benefits is 62. You can find the full breakdown of the benefit reduction on the SSA’s website.

Social Security Benefit Deduction

If you begin collecting your benefits prior to reaching full retirement age (FRA), the SSA deducts $1 from your benefit payments for every $2 you earn above the annual limit. For 2024, the limit is $22,320.

You can find a detailed chart of full retirement age based on birth year on the Social Security Administration’s website, but the current breakdown as of 2024 is:

• Born 1943 to 1954: Full retirement age is 66
• Born 1955: Full retirement age is 66 and 2 months
• Born 1956: Full retirement age is 66 and 4 months
• Born 1957: Full retirement age is 66 and 6 months
• Born 1958: Full retirement age is 66 and 8 months
• Born 1959: Full retirement age is 66 and 10 months
• Born 1960 or later: Full retirement age is 67

The deduction for wage earners is lower, but still present, during the year you reach full retirement age. The SSA will deduct $1 from your benefits for every $3 of income you earn over the 2024 limit of $59,520, but only for the months prior to reaching FRA.

Once you do reach full retirement age, your earnings will no longer reduce your benefits.

Are You Eligible for Social Security Benefits in Phoenix?

Social Security benefit strategies can be complex, especially given the unique rules regarding when you can begin taking benefits, the ways in which other earnings may reduce your pre-FRA benefits and the impact combined income can have on your marginal tax rate.

If you’re looking for advice on Social Security benefits planning, don’t hesitate to contact the financial advisors at Fullerton Financial Planning by calling (623) 974-0300.