What Is Social Security and Why Is It Important?
Social Security is a government program designed to provide financial support to retirees, disabled individuals, and dependents of deceased workers. Throughout your working years, you contribute to Social Security through payroll taxes. Once you reach retirement age, you can begin receiving benefits, which acts as a steady source of income to help cover essential expenses like housing, healthcare, and even daily living costs.
For many retirees, Social Security is a crucial part of their financial plan. While it’s not meant to be the sole source of income in retirement, it provides a safety net in addition to savings from retirement accounts (like 401(k)s and IRAs).
So, is Social Security taxable? The short answer: it depends. While some people won’t owe a dime in taxes on their benefits, others might have to pay taxes on up to 85% of what they receive. Let’s break it down in a simple way, so you can plan accordingly.
When Is Social Security Taxed?
Whether or not you’ll owe taxes on your Social Security benefits depends on your income level. To determine your income level, the IRS looks at your combined income, which includes:
- Your Adjusted Gross Income (AGI): This is your total income for the year before deductions.
- Non-taxable Interest: This is interest from things like municipal bonds, which the IRS doesn’t tax but is still included when figuring out if you’ll owe taxes on your Social Security benefits.
- Half of Your Social Security Benefits: The IRS only includes 50% of your Social Security income when calculating whether you’ll owe taxes on it.
What Types of Income Can Make Social Security Taxable?
Since your combined income includes more than just Social Security, other sources of income can push you over the tax thresholds. Here are some common examples:
- 401(k) and Traditional IRA Withdrawals: If you take money from a Traditional IRA or a 401(k), it’s considered taxable income and counts toward your combined income.
- Part-Time Work: Many retirees continue to work in some capacity, and those earnings count toward your combined income.
- Investment Income: Money earned from investments (like dividends, interest, and profits from selling assets) counts toward your total income.
- Pensions: If you have a pension, those payments will be included in your taxable income.
