Smart Management of Retirement Income—Taxation of Retirement Income
Taxation of Social Security Benefits
Many older Americans are surprised to learn they might have to pay tax on part of the Social Security income they receive. Whether you have to pay such taxes will depend on how much overall retirement income you and your spouse receive, and whether you file joint or separate tax returns. Check the base income amounts in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Generally, the higher that total income amount, the greater the taxable part of your benefits. This can range from 50 to 85 percent depending on your income. There is no tax break at all if you're married and file separate returns.
The IRS also provides worksheets you can use to figure out what's taxable and how much you might owe in taxes on your retirement income. You can find these worksheets in IRS Publication 554, Tax Guide for Seniors. If you do find that your income falls close to or within the limits that would trigger taxes on your Social Security income, you might be able to plan ahead so that some years you face the tax and some years you don't. For example, by timing when U.S. Treasury bills mature or postponing selling some stock, you might be able to bunch more of your income in one year—and thus pay the tax—while keeping the income just under the limits in another year. While most tax-exempt distributions count toward your total income, certain tax-exempt distributions, including those from a Roth IRA, do not affect your Social Security tax calculation.