For those approaching retirement Social Security benefits are the final component of retirement income and the last that we will discuss in our Retirement and Taxes series. While we recommend planning for retirement without counting on Social Security benefits they are still a large component of retirement income for many Americans.
Individuals can start pulling Social Security benefits at the age of 62. However, unreduced retirement benefits can only be withdrawn at “full retirement age”. Full retirement age can vary depending on the year you were born, but currently it ranges between ages 65 and 67. If benefits are withdrawn at age 62 they are reduced on a monthly basis to accommodate for the increased length of time that the Social Security Administration expects benefits will be paid. Typically, whether an individual retires early at 62 or waits until full retirement age the total benefits they receive over their lifetime will be the same. A call to the Social Security administration or going by the local office is worth the time to decide which option is best for you.
Once benefits are withdrawn, either none or only a part will be taxable on the individual income tax return. If Social Security benefits are the only taxable income source then a tax return is not required to be filed. Under current Internal Revenue Service rules no more than 85% of total benefits will be taxable. What percentage is taxable is based on combined income. Combined income is adjusted gross income plus tax exempt interest plus half of the Social Security Benefits received in a year.
If an individual or single return is filed:
· Up to 50% of benefits are taxable if combined income is between $25,000 – $34,000
· Up to 85% of benefit are taxable if combined income is over $34,000
If a married or joint return is filed:
· Up to 50% of benefits are taxable if combined income is between $32,000 – $44,000
· Up to 85% of benefit are taxable if combined income is over $44,000
Most states, including North Carolina, exempt Social Security benefits from retirement so state taxes typically are not affected. When discussing tax planning for retirement it is important to decide whether social security benefits will be a component as they have tax implications depending on the level of yearly income that is planned on for retirement.