Social Security helps seniors cover essential costs after they stop getting paychecks. But it's very important for retirees to have realistic expectations when it comes to what their benefits can do for them. Retirement checks may be smaller than you expect, and depending on your situation, you may not get to keep all the money that comes from them.
In fact, millions of retirees each year lose a portion of their Social Security to taxes imposed at the federal level. Unlike state taxation of benefits, this can't be avoided by moving. Retirees need to plan for it when assessing just how far their money will go.
How much will seniors owe in Social Security taxes in 2022?
Wondering just how big a bite taxes will take out of your Social Security checks? According to recent reports from The Senior Citizens League, the average amount of taxes owed on retirement benefits is $3,211 among affected households.
Now, that may seem like a lot, given that the average Social Security benefit of $1,657 provides just $19,884 in annual income. But it's important to note that this average is among affected households only. Not every household owes taxes on their Social Security payments. And many of the people who do are higher earners who may have benefits that far exceed the average or have plenty of other money coming in.
Even among those middle and high earners, though, losing several thousand dollars of retirement benefits could cause financial hardship — especially if it is unexpected. That's why it's so important for every current and future retiree to understand exactly what the rules are for when they owe federal taxes on their Social Security payments.
Will you owe taxes on your retirement benefits?
The first key step in determining whether you'll be taxed on retirement benefits is figuring out your provisional income. Provisional income, or countable income, is the measure of income used to determine when taxes are owed. To calculate yours:
Determine your taxable income.
Add in countable nontaxable income, such as municipal bond interest.
Add in half of the amount of your Social Security check.
If you do this calculation and your provisional income is between $25,000 and $34,000 as a single tax filer, you'll be taxed on up to 50% of your benefits. If your provisional income as a single filer exceeds $34,000, up to 85% of your benefits will be taxed. If you're a married joint filer, on the other hand, you'll be taxed on up to 50% of benefits with a provisional income between $32,000 and $44,000 and on up to 85% of your benefits once your income exceeds this threshold.
The taxes you personally owe on benefits may be lower than the $3,211 average paid by affected households — or they may be higher. The important thing is to be aware of the tax rules that apply to you and estimate what you'll owe before you retire so that you can make sure the Social Security income left over is enough to cover the costs you need it to pay for.
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