Social Security benefits can account for a sizable portion of retirement income, so it’s prudent to maximise your monthly payouts.
The amount of benefits you receive is mostly determined by your earnings throughout the course of your career and the age at which you file for Social Security. However, there are a few other factors that may lower the size of your checks, and if you are unprepared, you may receive less than you expect.
1. State-imposed taxes
Even if you are retired, you may still be taxed on your income. Social Security benefits are considered income in several states and are so subject to state taxation.
Fortunately, 38 states exempt Social Security from taxation. Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia are the 12 states that comply. North Dakota previously taxed benefits as well. However, beginning in 2021, Social Security will be free from the state’s income tax.
If you live in a place where benefits are taxed, there is little you can do to prevent it. However, by budgeting for this amount in advance, you can avoid unpleasant tax surprises in retirement.
2. Federal income taxes
Along with state taxes, you may owe federal taxes on your benefits. Whether or whether you are taxed on your benefits is determined by a figure called your “combined income.”
Your combined income is equal to the sum of your adjusted gross income (which may include 401(k) distributions or pension funds) and half of your yearly Social Security benefit amount. If your combined income exceeds $25,000 per year (or $32,000 for married couples filing jointly), you will be required to pay federal taxes on a part of your benefits.
The good news is that regardless of your income, you will not be required to pay taxes on more than 85 percent of your benefit amount. Additionally, Roth IRA distributions are not included in your combined income. The more percentage of your retirement income that comes from a Roth IRA, the lower your tax payment.
3. Unresolved debt
In rare situations, if you owe a considerable amount of money, a portion of your benefits may be garnished.
If you owe federal taxes, for example, the Treasury Department may withhold up to 15% of your benefits until your debt is repaid. Additionally, your benefits may be garnished for failure to pay child support, alimony, or restitution.
4. Earning an excessive amount
While many people opt to retire and file for Social Security benefits concurrently, you can continue working even after filing for benefits. However, depending on your age and income, if you continue to work, your benefits may be decreased.
If you do not achieve full retirement age (FRA) this year, your benefits will be cut by $1 for every $2 earned above $19,560. Thus, if you earn $25,000 per year, you are $5,440 over the cap. Your annual benefits would be decreased by $2,720, or around $227 each month.
If you expect to attain your FRA this year, your earnings will be subject to a separate cap. Your paycheck will be cut by $1 for every $3 earned over $51,960 per year in this situation.
Fortunately, these benefit cuts are temporary. After reaching your FRA, the Social Security Administration will recalculate your benefit amount, and your payments will no longer be lowered based on your earnings.
Maximizing your advantages
In other instances, you may have no choice over whether or not your benefits are lowered. However, this does not mean that you cannot prepare. By being aware of the potential impact of these four things on your Social Security, you can enter retirement prepared for anything.
If you’re like the majority of Americans, you’re falling behind on retirement savings by a few years (or more). However, a few little-known “Social Security secrets” may assist assure that your retirement income is increased. For instance, one simple method might earn you an additional $18,984 every year! Once you’ve figured out how to optimise your Social Security benefits, we believe you’ll be able to retire with the confidence and peace of mind that we all seek. Simply click here to learn how to obtain additional information about these tactics.