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Wait, I Am Taxed On My Social Security?

March 28, 2017

As you may know, Social Security was first introduced by President Roosevelt. Roosevelt said that Social Security would come with a promise “Social Security will not be taxed… it is not intended as a tax resource.” So what happened?

Political promises are sometimes short lived but this one lasted a long time as Social Security was not taxed for many many years. The change happened around 1983 when new laws were enacted in order to help maintain the solvency of the system. Sure, we know you don’t like it but why is this tax so unfavorable, why does it leave a particularly bad taste in your mouth? If you realize what is happening, it’s a tax on a tax, isn’t it? The money to fund this benefit was already taken from your paycheck before you could spend it- that’s a tax, right? So, when we go to collect it we have to pay tax on that same money. Unfortunately, it gets a little worse. Let’s look at how they figure out this tax.

Let’s take a look at some actual numbers;

  • Married Single Percent Taxed
  • Over $32,000 $25,000 50%
  • Over $44,000 $34,000 85%

About 70% of all beneficiaries are still safe. You’re among the 18 million or so who aren’t so lucky, though, if your “provisional income” is more than $25,000 on a single return or $32,000 on a joint return. So, if you are married and your provisional income is over $32,000 then about 50% of your Social Security benefits will be taxable. If you are married and make over $44,000 then about 85% of your benefits will be taxable.

Is $44,000 a lot of income in today’s economy? Back in 1983, $44,000 was a decent wage. So why do you think no one complained when they started taxing our benefits? That’s right most people were not making that kind of income. But how about now?

The good news here is that due to provisions in the tax code not everyone needs to pay these taxes.

Don’t assume that your state taxes the same amount of benefits as Uncle Sam. In most states, Social Security is still completely tax-free. Take a look at our state-by-state guide to taxes on retirees to learn more about how you will be taxed during retirement based on where you live.

In fact, there are multiple ways that these taxes can be avoided and sometimes very painlessly. Obviously, we would not want to lower our standard of living just to save a few dollars on taxes but sometimes the adjustments we make have little or nothing to do with our spending or enjoying our money. One way to find out is to have an analysis done by someone who looks at these kinds of things every day.

Planning for retirement can be overwhelming for some. There is a lot to know and for many that have already began retirement, there is no time to make mistakes. We can meet with you to create a plan or offer a second opinion at a complimentary visit.

Eric and Jennifer Lahaie
JEHM Wealth & Retirement




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