I will use several blog posts to discuss the taxation of social security benefits and its impact on one's retirement life.
How much Social Security Benefits Taxable?
Social Security benefits first became partially taxable in 1983, and the rule was expanded in 1993 to its current form. As the rules stand now, rising income can subject 50% or even 85% of Social Security benefits to taxation, until a maximum of 85% of all Social Security benefits are included in income for tax purposes.
Why It Matters?
The reason the taxability of Social Security matters is not just that it raises one's tax burden in the aggregate, but that it can boost one's marginal tax rate far above the tax bracket alone; those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!
What Are the Consequences?
Fortunately, this rate eventually reaches a cap - when the maximum amount of Social Security benefits are being taxed. Nonetheless, while you are going through the income levels where Social Security phases in - which can begin with as little as $25,000 of income for individuals - tax rates rise high enough that more proactive tax planning, from Roth conversions to the use of annuities and asset location strategies, becomes crucial to manage your overall tax exposure!
How much Social Security Benefits Taxable?
Social Security benefits first became partially taxable in 1983, and the rule was expanded in 1993 to its current form. As the rules stand now, rising income can subject 50% or even 85% of Social Security benefits to taxation, until a maximum of 85% of all Social Security benefits are included in income for tax purposes.
Why It Matters?
The reason the taxability of Social Security matters is not just that it raises one's tax burden in the aggregate, but that it can boost one's marginal tax rate far above the tax bracket alone; those in the 15% tax bracket may actually face marginal rates of 22.5% to 27.75%, and those in the 25% tax bracket can see marginal tax rates spike as high as 46.25%!
What Are the Consequences?
Fortunately, this rate eventually reaches a cap - when the maximum amount of Social Security benefits are being taxed. Nonetheless, while you are going through the income levels where Social Security phases in - which can begin with as little as $25,000 of income for individuals - tax rates rise high enough that more proactive tax planning, from Roth conversions to the use of annuities and asset location strategies, becomes crucial to manage your overall tax exposure!
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