Will You Pay Taxes On Your Social Security Benefit In Retirement?
Will Your Social Security Be Taxed in Retirement?
As you’re on the brink of retirement, you might be wondering to yourself…
“I’ve paid into Social Security my whole life as a tax, will it be taxed AGAIN!?”
The answer to this question won’t be the same for everyone.
Put simply — it depends.
First, it’s important to understand exactly how your Social Security benefits are taxed.
If you’re a FERS employee, you’ve paid into Social Security your entire working career.
Social Security has been a “tax” coming out of your paycheck (6.2%) each pay period.
Your employer also contributes 6.2%.
In theory, the government holds on to this money for you, and then it’s given back in the form of a SS payment when you decide to start receiving it.
Unfortunately for you, once you start receiving benefits, those benefits could be taxable.
It all depends on your “combined income” amount.
Your “combined income” is made up of your adjusted gross income, nontaxable interest income and half of your Social Security benefits.
If your combined income exceeds $25,000 annually, a portion of your Social Security can be taxed.
Your FERS pension, and any withdrawals and distributions from your TSP and IRA accounts are going to contribute to your “combined income” amount.
Up to 85% of your Social Security benefit can be taxed if you’re in the higher combined income thresholds! See the chart below from Investopedia.com.
The way to reduce or offset your combined income amount is through tax deductions.
The biggest tax deductions federal employees have typically include:
- Mortgage interest
- Dependent children
- Contributions to tax advantaged retirement plans
As you can imagine, these deductions often phase out or disappear completely in retirement.
(You might pay off your house, your kids are likely older and out on their own, and you’re no longer making contributions to a TSP or IRA).
If itemizing doesn’t make sense for you, the standard deduction in 2020 is $12,400 for single filers and $24,800 for married filers.
These amounts will reduce your “combined income.”
Let’s look at an example…
You’re a single individual who received a “combined income” amount $34,000 your first year of retirement.
You don’t have many deductions to itemize, so you use the standard deduction of $12,400.
This would reduce your combined income amount to $21,600.
You would NOT have any of your Social Security benefits taxed because the taxation starts at $25,000.
We’re only scratching the surface here, but I hope you have a good idea of how and why your Social Security benefits might be taxed in retirement.
-Your Friends at GPIS.
DISCLAIMER: GPIS is not a tax advisor. As always, please consult your tax advisor and/or Certified Public Accountant for any items relating to taxation.
WANT MORE INFORMATION?
We are here to help. Our goal is to provide you with the knowledge and tools to make educated decisions when it comes to your benefits and retirement. Contact us today!