Many Americans still believe that their Social Security benefits cannot be taxed, and that is a false assumption.
Yes, the ‘lucky’ 50% (who pay taxes on their benefits) are those in higher income brackets, however, such a tax (on social security) can be unexpected and can impact retirement planning.
An excellent article is found at Forbes.com entitled: Do You Need To Pay Tax On Your Social Security Benefits? By Kelly Phillips Erb (Feb. 15, 2018)
The article offers an overview with simple –to- follow and easy to understand ‘real- life’ examples.
Keep in mind that every tax situation is different and tax regulations change! It is beyond the scope of this article to identify individual situations.
Taxation of social security benefits means that there is also an effect on estate planning…with less ‘disposable’ income post-retirement, there is the likelihood that your estate plans for: Establishing/funding trusts (for children; grandchildren; spouse; family member); Financially helping family members or Charitable giving may become ‘unhinged’.
Remember, for most Americans the basic elements of a comfortable retirement income are: Social Security; Pension (although fewer people have pension plans) or IRA’s; and Savings/investment income.
If taxes (or other financial upheaval) erode any of those income streams, then there will be an impact on your post-retirement funds.
The necessary funds you will require after you retire will remain to be covered: food, clothing, healthcare, housing and utilities, travel and entertainment, and gift giving. Having less (after-tax) income can impact future retirement finances.
I have previously written that seniors must first look to the likelihood that their post-retirement “income” will be substantially lower than pre-retirement.
Their first responsibility is to assure that their own needs are taken care of into the future when they retire.
Such an approach may seem ‘self-centered’ but the logic is that unless you have adequate income after retirement and beyond, there is always the chance that you could be seeking financial assistance from family members in your ‘golden years.’
Consult with your financial planner and tax adviser before your retire to find out what strategies are available to minimize the tax you might be paying on your social security benefits going forward. Learn the difference between earned income; dividend and interest income and qualified withdrawals.
And remember that your Social Security benefits can be taxable.
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