Investing

Is the Government Coming for a Piece of Your Social Security Checks? | The Motley Fool

Social Security will be one of the most important sources of income that you rely on in your later years. You don’t have to worry about these benefits running out and can count on them going up when inflation increases prices, thanks to the way the retirement benefits program is designed.

But, you may be surprised to find that you don’t always get to keep all of your benefits. In fact, depending on your earnings and where you live, both the federal government and your state government may want to keep a piece of your payments. 

Image source: Getty Images.

Will you need to give the federal government a cut of your benefits?

The first potential way you could lose part of your Social Security benefits is if the federal government takes some of them in taxes. Around 50% of retirees end up having to pay some of their hard-earned benefits to the IRS. 

You could be one of them if your provisional income exceeds $25,000 as a single tax filer or $32,000 as a married joint filer. Once your income hits this threshold, you’ll be taxed on up to 50% of your benefits. 

If your income is a little higher — $34,000 for single filers or $44,000 for married joint filers, you could lose even more of your benefits. At this point, up to 85% of benefits is taxed.

Now, the good news is, not all your income counts in calculating the “provisional income” that this threshold is based on. Provisional income is half of Social Security benefits plus all taxable income and some non-taxable income.

Still, these thresholds aren’t subject to increases due to inflation so a growing number of retirees will have a provisional income above these thresholds and will end up having to give up some of their retirement income to cover federal taxes. 

What about your state government? 

You could also end up having to give up some of your benefits to your state government.

You won’t have to worry about this if you live in one of the 37 states that don’t tax Social Security checks. But if you live in one of the other 13, you’ll have to learn what the rules are for when your Social Security becomes taxable. The income limitations may be different in some states than the IRS rules, so you should check with your individual location’s revenue authority if you live in one of these 13 locations:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

It’s very likely that you would end up owing both state and federal taxes on benefits if you reside in one of these places, so you could lose quite a hefty chunk of your total retirement income from Social Security to various taxing authorities. 

It’s important to plan for taxes that you may owe on benefits, either by taking steps to avoid them, such as choosing to invest in a Roth IRA throughout your career or by working these taxes into your budget when you make retirement plans. So be sure you know what obligations you’ll have to the government before you retire and claim your Social Security checks. 


Most Related Links :
Business News Governmental News Finance News

Need Your Help Today. Your $1 can change life.

[charitable_donation_form campaign_id=57167]

Source link

Back to top button