The $34,000 Line That Makes Up to 85% of a Single Retiree’s Social Security Taxable
Most single retirees assume their Social Security checks are safe from federal taxes, but a surprisingly modest amount of outside income can trigger a bill on a large chunk of those benefits. Knowing exactly what counts toward that threshold could…
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There are many older Americans today who live on Social Security alone. The average monthly Social Security retirement benefit is $2,088, which amounts to about $25,000 per year.
If you’re single and collect an average Social Security benefit, and that’s your only source of income, you may get to keep your entire check as far as the federal government is concerned. But you should know that once your income reaches a moderate level, up to 85% of your Social Security checks could be taxed at the federal level.
That’s something to keep on your radar if you have income outside of those monthly benefits.
How taxes on Social Security work
You might think that since Social Security benefits are earned by paying taxes on wages, you can keep your checks entirely in retirement. But if you have a moderate provisional income, you risk having up to 85% of your Social Security checks taxed.
Provisional income is calculated by adding up your adjusted gross income (AGI), tax-exempt interest income (which is what some retirees collect by holding municipal bonds), and 50% of your annual Social Security benefit. If the total is between $25,000 and $34,000, up to 50% of your Social Security benefits could be subject to federal taxes.
Once your provisional income exceeds $34,000, up to 85% of your Social Security checks could be taxed at the federal level.
These thresholds are a bit higher for married couples filing joint tax returns. But if you’re single, you get even less leeway before taxes come into play. So it’s important to know what counts toward provisional income so you can keep yours as low as possible.
A good way to keep more of your Social Security
Lowering your provisional income could reduce your chances of having your Social Security benefits taxed. And choosing the right home for your retirement nest egg could spell the difference between having your benefits taxed or not.
Let’s imagine you’re single and receive $2,000 a month in Social Security, or $24,000 per year. Let’s then say your only other source of income is a $50,000 annual withdrawal from a traditional IRA.
In that case, your provisional income is the sum of 50% of your annual Social Security benefit, or $12,000, plus $50,000, for a total of $62,000. You’d be looking at having up to 85% of your Social Security benefits taxed in that situation.
Now, let’s say your $50,000 annual withdrawal comes out of a Roth IRA. Roth withdrawals are not included in AGI, so in this case, your provisional income would only be $12,000. That means you wouldn’t pay taxes on any of your Social Security.
So, if you want to keep more of your Social Security, the solution could boil down to choosing a Roth IRA for your savings instead of a traditional one.
If you’ve already been saving in a traditional IRA, you can look at doing a Roth conversion ahead of claiming Social Security. This allows you to move funds to a Roth IRA, pay taxes on the amount you convert, and then enjoy the benefits a Roth IRA has to offer.
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Maurie Backman has more than a decade of experience writing about financial topics, including retirement, investing, Social Security, and real estate. Her work has appeared on sites that include The Motley Fool, USA Today, U.S. News & World Report, The Washington Post, and Kiplinger.
Prior to becoming a full-time financial writer, Maurie worked in the financial industry trading distressed debt. She then changed course and spent a few years designing electronic toys. After a stint in content marketing and UX, she shifted back into writing and has since covered everything from the housing market to estate planning to Medicare.
When she's not busy writing, Maurie can be found hiking, walking her dogs, driving her kids to their various sports practices and games, and curling up with a good book. She cooks on occasion and bakes way too often.
