The requirement to pay income tax on Social Security benefits comes as a surprise to many retirees, according to Frank Jaffe, an advisor with Access Wealth Planning in Roseland, N.J.
Financial advisors need to know this and be prepared to warn clients about the issue, Jaffe says. Tax planning affects when a person should take Social Security benefits and when benefits should be delayed and that money instead taken from an investment portfolio.
For an individual, 50 percent of Social Security benefits are subject to income tax if the individual’s income is more than $25,000 a year and 85 percent of benefits are subject to tax if the income is more than $34,000 a year, according to the Social Security Administration.
For a couple, the respective income levels are $32,000 and $44,000. Income for these purposes includes adjusted gross income, tax-exempt interest income and half of the Social Security benefits.
In most situations, a retiree is better off delaying receiving Social Security benefits until he or she is 70 years old because benefits grow by about 8 percent a year until the recipient reaches 70.