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Britt Erica Tunick is an award winning financial journalist who has spent the past 17 years writing about virtually every aspect of finance. She has mastered the art of boiling down complicated financial topics for readers to understand. |
A common misconception is that when you retire, taxes go away. Unfortunately, they don't. Factoring taxes into your retirement plan is a necessity. What You Should Know About Social Security Benefits and Taxes By Britt Erica Tunick If you’ve always believed that one of the major benefits of retirement (beyond the whole not having to work anymore thing) is that you won’t have to pay taxes anymore, think again. Even though the Social Security benefits you’ll be paid once you retire basically come from money you’ve already paid in taxes into the system throughout your work life, as crazy as it may seem, the federal government will hit you for taxes yet again on the Social Security checks you receive in retirement if your individual income exceeds more than $25,000 annually, or more than $32,000 if you are married and file a joint tax return. As with everything tax related, where you live also factors in to what you can expect to pay in taxes on your Social Security income when you retire. As the moment, there are 13 states that impose additional taxes on Social Security benefits, four of which (Minnesota, North Dakota, Vermont and West Virginia) impose adjusted gross-income limits equal to those imposed by the federal government. Following is a list of the remaining states that impose state taxes on Social Security benefits:
The taxes you will pay in retirement are based on the combination of 50% of your income from Social Security and your modified adjusted gross income (the combination of your gross adjusted income and any tax-exempt income you might earn from sources such as municipal bonds). Given this reality, it is important to factor taxes into your retirement plans, particularly if you will have significant one-time events that will skew your earnings in any given year, such as the sale of a home or business. If you already know that your retirement income is likely to trigger significant taxes, you should work with a financial advisor to determine any ways that you can potentially plan ahead to minimize such taxes as much as possible. |
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