5 Social Security Tax Surprises We See Most With Married Couples, According to Experts
Social Security benefits may seem straightforward, but the tax rules surrounding them can get complicated quickly for married couples.
One spouse’s pension, IRA withdrawal or even investment income can affect how much of the couple’s Social Security becomes taxable. Because the income thresholds used in the calculation are relatively low, retirees can easily encounter a bigger tax bill than they expected.
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Here are five Social Security tax surprises experts commonly see with married couples.
1. Your Spouse’s Income Can Make Your Social Security Taxable
Married couples filing jointly need to look at their income together rather than thinking about each spouse’s Social Security separately, according to Chris Rivera, certified public accountant (CPA) and founder of The Ecommerce Accountants.
“A common surprise is that … one spouse’s pension or IRA withdrawal can make the other spouse’s Social Security taxable,” he explained. Couples who budget around their benefit checks can underestimate how their other retirement income changes the tax bill.
For married couples filing jointly, benefits can begin becoming taxable when that combined income exceeds $32,000, per the IRS Above $44,000, up to 85% of benefits can potentially be taxable.
2. ‘85% Taxable’ Does Not Mean an 85% Tax Rate
Up to 85% of benefits can be included in taxable income, which is one of the easiest Social Security rules to misunderstand. "Up to 85% taxable” does not mean an 85% tax rate — it just means that as much as 85% of the benefits can be included in income and taxed at the couple’s applicable rates," Rivera explained.
“Crossing $44,000 also doesn’t automatically make the full 85% taxable," he added. "The amount depends on the calculation."
3. A $10,000 IRA Withdrawal Can Add Much More to Income
Couples may budget for the taxes on an IRA withdrawal without realizing that the withdrawal itself can make more of their Social Security taxable, White pointed out. In certain income ranges, an additional $1 of retirement income can result in as much as another 85 cents of Social Security becoming taxable.
Ruth White, enrolled agent (EA) and co-founder of White Sands Tax Services, gave an example of a couple receiving $40,000 in Social Security and $40,000 in taxable pension income. About $19,600 of Social Security would be treated as taxable. If they then took a $10,000 taxable IRA distribution for something like a home repair, taxable Social Security would rise to $28,100.
“So, in this case, their distribution of $10,000 caused an additional $8,500 of Social Security benefits to be taxed and increased their adjusted gross income by $18,500,” she said.
4. Even Tax-Exempt Interest Can Affect the Calculation
Pensions, taxable IRA and 401(k) withdrawals, wages, dividends and realized capital gains can all affect combined income, Rivera pointed out. One overlooked inclusion is municipal bond interest. “Although generally exempt from federal income tax, it still counts when determining whether Social Security benefits are taxable,” Rivera said.
This is why couples shouldn't estimate their Social Security tax exposure based solely on pensions and retirement-account withdrawals. Investment activity and part-time work all impact taxes.
5. RMDs Can Create Taxable Income Whether You Need the Money or Not
Required minimum distributions (RMDs) can also change the tax equation later in retirement because taxable distributions add income even when retirees don't need the money for expenses.
White explained that delaying the first RMD until the following April can also result in the retiree taking two RMDs in the same calendar year.
Final Take: Planning Ahead Can Help Reduce the Surprise
Rather than waiting until tax season to discover tax consequences, couples can project Social Security benefits alongside RMDs, pensions, withdrawals, investment income and other sources before making large financial moves.
“The point is to avoid focusing on the taxable distribution after the fact, when tax returns are prepared,” White explained.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.
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