When the talk about your financial future in retirement comes into play, making the most of your Social Security benefits is the main title. But have you ever wondered if there’s a way to increase your retirement income even further? One of the first considerations in the quest to maximize your retirement income is understanding the tax implications of Social Security payments.
Surprisingly, up to 85% of your Social Security benefits may be subject to taxation if you have additional income sources during retirement. This includes income from part-time work, pensions, or investments. If you’ve reached your full retirement age (FRA) and your income exceeds $34,000 as an individual filer or $44,000 as a joint filer in a tax year, you may be subject to taxes on up to 85% of the benefits. Furthermore, if you decide to start receiving Social Security benefits at age 62, you’ll also need to adhere to the regulations set by the Social Security Administration (SSA) and the Internal Revenue Service (IRS). These rules impose direct reductions on your benefits based on your income level.
Will Ever My Retirement Income Be Tax-Free? Well, Yes and No, It Depends
The earnings-test regulations previously mentioned cease to apply once you reach your FRA, which is 67 for individuals born in 1960 and later, or a slightly earlier age for those born before that. Once you’ve reached this milestone, you can earn as much as you’d like without any reductions in your benefits. However, it’s important to note that you may still be liable for taxes on your benefits if your income exceeds the earnings threshold.
Now, there’s another option you could consider: you can temporarily suspend your benefits if you decide to continue working and/or collecting Social Security credits. By doing so, you can potentially increase the amount you receive in the future, especially if you wait until your FRA.
Furthermore, if you are in the position, you could wait to your FRA and start your retirement without any reduction or cut. By delaying benefits, you may have fewer taxable income sources during the earlier years of retirement. This can potentially reduce the portion of your benefits subject to taxation.
If you’re the higher-earning spouse, delaying benefits can also benefit your surviving spouse. They will receive a higher survivor benefit based on your delayed, higher benefit amount. Always keep in mind that all this information we give you is by way of advice, and that it is always prudent to consult an expert in Social Security and retirement services, such as a lawyer or a duly accredited counselor.
How Does the IRS Collect Taxes From Social Security Payments?
The entity responsible for collecting taxes from Social Security payments in the United States is the Internal Revenue Service (IRS). When individuals receive Social Security benefits, they may be required to pay federal income taxes on a portion of those benefits if their total income exceeds certain thresholds. The IRS administers the rules and regulations related to the taxation of Social Security benefits and ensures that individuals comply with their tax obligations.
Not all Social Security benefits are subject to federal income tax. The IRS uses a formula to determine whether your benefits are taxable. The formula takes into account your combined income, which includes half of your Social Security benefits, plus your other sources of income. If your combined income exceeds certain thresholds, a portion of your benefits may be subject to taxation, and it can be as high as 85%, as we previously told you.