Download the following support materials:

Field Guide to Social Security
Social Security Workbook
 

Everyone who had a job in high school remembers the shock of that first paycheck. Where did all the money go? What’s up with this box marked “taxes?”

Tax season is a good time to talk with clients about not only their current income taxes, but also to look ahead to future taxes. When it comes to counting on Social Security’s projected income estimates, they may need a reality check.

With a few clicks, clients can log on to the Social Security Administration’s “my Social Security” site for a customized estimate of their retirement benefits. But that’s where retirement planning may go awry.

That projected amount isn’t the full picture. It may be taxed as income. Don’t let that come as a shock to new retirees thinking they were going to be collecting a lot more in annual benefits than they end up keeping. Saving a little more than they think they need now, or setting up additional streams of dependable lifetime income, could cushion that blow later.

The way the government calculates how much to tax Social Security benefits is a bit complicated. Those nearing retirement may want to consult a qualified financial professional. And while no one is taxed on more than 85% of their Social Security benefits, that can still add up.

For example, currently if married clients’ total household income tops $32,000 they’ll owe taxes on some of their Social Security income. Social Security sends a tax reporting form at the start of each year, like an employer, called SSA-1099.

For the purposes of calculating Social Security taxes, the government looks at:
  • Adjusted gross income.
  • Plus tax-exempt income.
  • Plus half of all Social Security benefits received.

If adding all those streams totals between $32,000 and $44,000 (remember, this is a married couple, different figures apply for single filers), the couple pays income tax on up to 50% of the Social Security income.

If those streams top $44,000, they could be paying federal income taxes on up to 85% of their Social Security income.

The important thing to consider when calculating expected Social Security retirement income is that what clients see may not be what they get to keep. Explaining this reality as clients plan for retirement could uncover a need for additional retirement income. It’s always better to be prepared than to be surprised.

Learn more about Social Security and view more of the available resources by visiting the Field Guide to Social Security Resources page.


Neither Transamerica nor its agents or representatives may provide tax or legal advice. Anyone to whom this material is promoted, marketed, or recommended should consult with and rely on their own independent tax and legal advisors regarding their particular situation and the concepts presented herein.

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