When trying to organize your finances for your retirement, you’re likely going to be factoring in your benefits from Social Security to help you handle some of your expenses. While many variables are involved in how much Social Security income you can receive, it’s important to consider the implications of your retirement age and other income streams when managing your finances.
According to the Social Security Administration (SSA), the maximum benefit you could earn if you retire at full retirement age in 2023 would be $3,627. If you retire at 62 in 2023, the maximum benefit would be $2,572. If you retire at age 70 this year, the maximum benefit would be $4,555.
The average monthly retirement benefit for Social Security recipients is $1,781 as of February. We recently looked at the average Social Security benefit, and today we will focus on Social Security taxes.
Do You Have To Pay Taxes on Your Social Security Income?
Social Security income and taxes can be a confusing topic since your tax situation can be fairly straightforward during your working years if you receive your income from one source. When you’re working, you submit your employment income and your various other investment streams when you file your federal taxes to figure out where you stand. When you retire, your income may arrive from multiple sources with different characteristics (a pension plan, real estate holdings, etc.).
While the benefits you receive from Social Security are taxable at the federal level, your overall income will determine whether you pay taxes. According to the SSA, you’ll have to pay federal income taxes on your benefits when you have a significant amount of income in addition to your benefits. For example, if you have self-employment income, dividend income and other taxable income streams, then you may have to pay taxes since you’re likely earning over the threshold.
Every January, you should receive a Social Security Benefit Statement (Form SSA-1099) showing you the benefits you received in the prior year. You then have to disclose this Benefit Statement when you work on your federal income tax return. During this process, you’re going to find out whether your benefit will be taxed or not.
What Are Taxes Like for Social Security Income?
How much are taxes on your Social Security benefits? This will depend on your overall income and your marital situation. It’s difficult to disclose how much one should expect to pay in taxes, but there’s a formula available. According to the IRS, the fastest method for determining whether you’re going to pay taxes on your benefits is to do this:
Take half of your Social Security benefits and then combine this amount with your other income streams (this also includes tax-exempt interest) to determine your adjusted gross income. If that combined income is above the threshold, then you’re going to have to pay some taxes. The percentage of your Social Security benefit subjected to taxes depends on how much you earn.
The limit, known as the base amount, is $25,000 for single filers and $32,000 for joint filers. If an individual filing a federal tax return has a combined income of $25,000 to $34,000, the person might have to pay income taxes on about 50% of benefits. If the combined income is over $34,000, the person would have to pay taxes on up to 85% of benefits.
Those filing a joint federal tax return are looking at paying income taxes on up to 50% of their benefits if the total income is between $32,000 and $44,000. If the combined income exceeds $44,000, they would have taxes on up to 85% of their benefits.
What’s the Maximum Social Security Benefit?
The magical number for the maximum monthly benefit that you could receive from Social Security is $4,555. The SSA will take your 35 inflation-adjusted highest-earning years in the workforce into account when determining your monthly benefit.
You become entitled to your full monthly benefit based on your earnings history when you reach your full retirement age, which will be either 66 or 67, depending on your date of birth. Your benefits will grow by 8% for each year you delay filing for your benefit beyond full retirement age. To earn your maximum benefit, you must hold off on applying until you’re 70.
The maximum benefit you receive as a Social Security recipient will depend on the age at which you retire. The maximum benefit for those retiring at 62 is currently $2,572. If you manage to earn the maximum Social Security benefit, then you’ll be earning $4,555 monthly. This then leads to an important question …
What Happens When You Earn the Maximum Social Security Benefit?
What happens to your taxes when you qualify for the maximum Social Security income of $4,555? You’re going to be taxed accordingly when the IRS factors in your combined income. These calculations will depend on how many other income streams you have in your retirement years. If you’re over the limit, then you’ll have to pay taxes on 85% of your benefits from Social Security. This is on top of any additional taxes that you’re going to have to pay on your other income streams.
While trying to determine your Social Security taxes can feel overwhelming, it’s important to note that there are tools you can rely on to help you make the best financial decisions. It’s also worth mentioning that even though the maximum benefit for Social Security has been increasing over time, this should be considered a supplemental income used to cover some of your expenses.
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