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Social Security benefits provide a crucial source of income for many retirees and individuals with disabilities so it's important to understand how these benefits are taxed.
In general, Social Security benefits can be subject to federal income tax if your total income exceeds a certain threshold. The amount of your benefits that are taxable depends on your filing status and combined income. Combined income is defined as your adjusted gross income, plus any non-taxable interest, plus half of your Social Security benefits.
The following tiered system determines the percentage of your benefits that are taxable (kiplinger.com).
In addition, 10 states currently tax Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Montana, Nebraska, New Mexico, Rhode Island, Utah and Vermont.
There are certain strategies you can use to potentially minimize the taxes on your Social Security benefits. For example, you may be able to reduce your taxable income by contributing to tax-advantaged retirement accounts, such as a traditional IRA or 401(k). Additionally, you could consider spreading out the timing of your withdrawals from retirement accounts in order to keep your income below the taxable thresholds.
It's also worth noting that not all Social Security benefits are subject to federal income tax. Supplemental Security Income (SSI) benefits, for example, are not considered taxable income. In addition, if Social Security is your only source of income, your benefits may not be subject to taxation at all.
Consulting with a financial advisor or tax professional can provide personalized guidance on how to minimize the tax impact on your benefits. By staying informed and proactive, you can maximize your financial security in retirement.