Tens of millions of retirees rely on Social Security for a large chunk of their retirement income, and many of them are surprised to find out that, under some circumstances, they'll have to share some of their hard-earned benefits with the IRS. Yet the rules for taxation of Social Security are extremely complicated. In order to help you navigate those rules and get the answers you need to plan for your retirement, you'll find a useful calculator further down to give you precise figures you can use in your tax preparation.

Understanding Social Security taxation

The basic rules for how Social Security benefits get taxed aren't as hard to understand as the calculations themselves. The IRS starts by calculating what's known as modified adjusted gross income, which includes all your ordinary taxable income, but also adds in tax-exempt interest. Then, you take one-half of your Social Security benefits, and add them to the total. The resulting figure is the key to figuring out the extent to which your benefits will get taxed.

The threshold numbers at which taxes start to hit depend on your filing status. For joint filers, income higher than $32,000 may force you to include as much as 50% of your benefits as taxable income. You potentially may have to include an even higher 85% of your benefits if your income is higher than $44,000. The corresponding figures for single filers are $25,000 and $34,000.

Yet the way that Social Security taxation works doesn't involve a "cliff" at which a huge portion of your benefits get taxed. The rules are structured so that if you're only a little bit above the corresponding limits, then only a small amount of your benefits will be subject to tax. As your income climbs further above the threshold amounts, though, the likelihood gets greater that the 50% and 85% maximum ceiling amounts will get hit.

 

* Calculator is for estimation purposes only, and is not financial planning or advice. As with any tool, it is only as accurate as the assumptions it makes and the data it has, and should not be relied on as a substitute for a financial advisor or a tax professional.

How to lower your tax bill

As you can see in working with the calculator, there are a few things you can control to try to reduce your tax burden on your Social Security benefits. Note that taxable IRA distributions add to your gross income, and therefore can subject more of your benefits to tax, but tax-free Roth IRA distributions don't increase your income. If you have both types of accounts available, finding the right balance can have a dramatic impact on your taxes.

Similarly, capital gains income is included in gross income. By choosing not to sell a stock at a gain, or by taking losses on your less-successful investments, you can have an impact on how much in capital gains income you add to your total.

Contributing to an IRA lets you deduct from your gross income for purposes of Social Security taxation. If you still have earned income from work, and are eligible to contribute to an IRA, then doing so can help you shelter more of your Social Security benefits from tax.

When should I start taking social security benefits?

The other thing that calculating your potential tax burden from Social Security can help you with is whether it makes sense to take benefits in the first place. Some find that, when they see how much of their benefits will go to the IRS, they have more of an incentive to wait before filing to receive those benefits in the first place. Especially for those who are still working and will hit upper threshold amounts on income, the specter of tax on Social Security benefits can be a powerful deterrent that encourages people to put off claiming benefits until they retire -- along with the boost in monthly payments that claiming later can bring.

Trying to plan with Social Security benefits can be extremely complex, especially when you have other forms of income that you have to deal with. By knowing about these three facts, though, you'll put yourself ahead of the game, and have a better chance of getting the full benefits you deserve in retirement.

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