You’ve worked hard in your adult life, and it is now time to retire and start receiving your Social Security benefits. For each paycheck, there has been a deduction to pay into Social Security or you paid self-employment taxes. Now it is time to reap the rewards on the other side … or is it? Many may not be aware that Social Security benefits are taxable under certain conditions.

Modified Adjusted Gross Income (MAGI)

A portion of your Social Security benefits may be subject to federal income tax if your modified adjusted gross income (MAGI) plus one-half of your Social Security benefits exceed specific limits. Your MAGI equals:

• Adjusted gross income (or the adjusted gross income of you and your spouse if married and filing jointly), including wages, interest, dividends, taxable pensions, and other sources,
• Tax-exempt interest income and
• Amounts earned in a foreign country, U.S. possession, or Puerto Rico that are exempt from tax.

Up to 50 percent of your Social Security benefits may be subject to income tax if your combined income (MAGI plus one-half your Social Security benefits) exceeds $25,000 in 2023 for an individual filing single, unmarried head of household, or qualified widow(er) with dependent ($32,000 in 2023 if married and filing jointly).

If your MAGI plus one-half your Social Security benefits income exceeds $34,000 in 2023 ($44,000 in 2023 if married and filing jointly), up to 85% of your benefits may be taxable. If you are married and filing separately, up to 85% of your benefits will be taxed unless you and your spouse live apart for the entire year.

Are Spousal, Survivor, Disability and SSI Benefits Taxable?

These programs follow the same general rules as the Social Security program for retirees, except for Supplemental Security Income (SSI).

Spousal Benefits

If you are collecting spousal Social Security benefits based on your marital partner’s (or ex-spouse’s) benefits, the rules are the same as for all other Social Security recipients.

Survivor Benefits

Survivor benefits paid to children are rarely taxed because few children have other income that reaches the taxable ranges. The parents or guardians who receive the benefits on behalf of the children do not have to report them as part of their income.

Disability Benefits

Social Security disability benefits follow the same rules on taxation as the Social Security retiree program.

SSI Benefits

SSI is NOT Social Security. It is a needs-based program for people who are blind, disabled, or age 65 and older without disabilities who meet the financial qualifications. SSI benefits are not taxable.

Paying Taxes on Social Security

If you are taxed on your Social Security benefits, you can cover the taxes in one of two ways. You may make quarterly estimated tax payments to the IRS or have federal income taxes withheld from your Social Security benefits.

State Taxes on Social Security

Eleven states currently tax Social Security benefits in some cases. Check with your state tax agency if you live in one of these states—Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

The Bottom Line

Most advice on Social Security benefits focuses on when you should start taking benefits. Still, another consideration is to analyze what portion of your Social Security benefits are taxed.

The experienced professionals at Busey Wealth Management can help you develop a financial plan, whether you’re looking at retirement and taking Social Security in the near future or years down the road. To learn more about our comprehensive services, visit busey.com/wealth-management.

This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.

This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.

This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.

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