Social Security Benefits Are Taxed? Ouch!
No Refund This Year
After decades of understanding how his income taxes worked, Barry was taken aback as a retiree learning to connect disparate dots of income.
He said, “I couldn’t believe I misunderstood ‘income.’ Thought I’d get a refund and instead ended up with a tax bill. Ouch!”
His $38,000 Social Security benefit, plus Lydia’s $17,500, pushed them into the 35% tax bracket by a few thousand dollars. If he had known how Social Security was taxed, he could have held off on some transactions that kicked off capital gains.
A Tricky Transition
The first year with no W-2 can catch clients off guard. They don’t understand each different income source’s tax withholding rules. Or the impact of combining many new taxable sources, including Social Security.
In Barry’s case, the bulk of their income came from IRA distributions. Typically, an IRA custodian only withholds 10% as prepayment on the tax obligation. A client can change the amount withheld, but still may not get the percent just right.
Social Security payments do not come with any withholdings. Interest, dividends and capital gains aren’t reported until year-end. The individual pieces don’t come together until tax time. That’s when newly retired clients find out they’re in a higher tax bracket and their estimated payments didn’t completely cover their tax bill.
Important IRS Resources for Clients 65 and Older
Financial advisors can help clients navigate full-on retirement. Offer these IRS resources to help clients connect new dots:
Moving into full-time retirement isn’t just about waiting until 70 to claim Social Security. New tax issues unexpectedly rise to the surface. Help your clients prepare for what “retiree income” really means.
Marcia Mantell is the founder and president of Mantell Retirement Consulting Inc., a retirement business development, marketing & communications, and education company supporting the financial services industry, advisors and their clients. She is author of “What’s the Deal with Retirement Planning for Women?,” “What’s the Deal with Social Security for Women?” and blogs at BoomerRetirementBriefs.com.
