June 21, 2024

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How to Avoid the Social Security Tax Torpedo

2 min read

A senior couple dealing with unexpected Social Security taxes, commonly referred to as the Social Security tax torpedo.

While retirees may be chagrined to discover that taxes don’t end when they leave the workforce, an unseen threat looms behind the U.S. tax code. The Social Security tax torpedo is as destructive as it sounds, blowing up the budgets of unsuspecting retired folks eagerly awaiting their first Social Security check. Having a clear understanding of your Social Security taxes could help you dodge this torpedo in retirement. Here’s what you need to know.

A financial advisor can help you create a financial plan to minimize your taxes in your golden years.

What Is Social Security Tax Torpedo?

The Social Security tax torpedo is a spike in taxes retirees can experience after receiving Social Security income. Specifically, 50% to 85% of your Social Security check may be taxable, depending on your income level and life circumstances. In addition, your Social Security income can increase your marginal tax rate, meaning the top portion of your income enters the next tax bracket. As a result, unsuspecting retirees can pay heavier taxes than anticipated, and their Social Security benefits provide less of a financial boost than expected.

Tax Torpedo Implications

The government bases your taxes in retirement on your modified adjusted gross income plus any nontaxable interest (usually from municipal bonds) and half of your Social Security benefits. The resulting sum is called your ‘combined income,’ which incurs different taxes depending on the amount and the filer’s status.

For instance, single filers with a combined income of $25,000 to $34,000 pay taxes on 50% of their benefits. An income above this amount results in taxes on 85% of the benefits. Likewise, those married filing jointly with combined incomes between $32,000 and $44,000 will pay taxes on 50% of their benefits. Any amount above this incurs taxes on 85% of the benefits.

Remember, the tax torpedo…

2023-11-25 11:00:18

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