Factor 8: Taxation of Your Benefits

Social Security benefits are not tax-free for everyone. Since 1984, the federal government has taxed a portion of benefits for retirees with moderate to high incomes. The Internal Revenue Service uses a specific metric called “Combined Income” to determine your tax liability. Your Combined Income equals your Adjusted Gross Income, plus your nontaxable interest (such as municipal bonds), plus 50 percent of your Social Security benefits.

If you file your taxes as a single individual and your Combined Income falls between $25,000 and $34,000, up to 50 percent of your benefits may be taxable. If your Combined Income exceeds $34,000, up to 85 percent of your benefits face federal income tax. For married couples filing jointly, the thresholds are $32,000 and $44,000, respectively. Because these thresholds were established decades ago and have never been adjusted for inflation, more retirees trigger these taxes every single year.

Additionally, where you live plays a major role. While the vast majority of states do not tax Social Security at the state level, a handful of states still assess taxes on your benefits depending on your age and income bracket. Factoring in both federal and state taxes is essential for accurately projecting your net monthly income. You can find detailed guidance on federal withholding rules at the Internal Revenue Service.