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Can I keep all my $2,700 monthly Social Security benefits, or will taxes be reduced?

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Social Security plays a critical role in the retirement plans of millions of Americans, but how these benefits are taxed is sometimes overlooked. If you receive $2,700 per month in Social Security benefits, your check will be well above the average retirement benefit of about $1,800 per month, and this may mean you owe taxes on this money. However, there are ways to potentially reduce your tax liability. Consider working with a financial advisor to create a comprehensive financial plan for retirement that takes into account your Social Security benefits and tax situation.

Social Security taxes are calculated on a “combined income” basis. As your combined income increases, you may owe taxes on a larger percentage of your benefits. This is how the combined income is calculated:

For example, suppose you withdraw $50,000 from your 401(k) and receive $40,000 in annual Social Security benefits. Your combined income would be $70,000 ($50,000 + $40,000/2).

From there, the IRS uses the following income levels to tax the benefits of people who file their taxes as individuals:

  • Combined income less than 25,000: Distributions are not taxable

  • Combined income between $25,000 and $34,000: Up to 50% of benefits are taxable

  • Combined income above $34,000: Up to 85% of benefits are taxable

If you file a return jointly with your spouse, the following income levels determine the taxability of your social security:

  • Combined income less than $32,000: Benefits are not taxable

  • Combined income between $32,000 and $44,000: Up to 50% of benefits are taxable

  • Combined income above $44,000: Up to 85% of benefits are taxable

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Please note: these are not the tax rates. Rather, this means that up to 50% or up to 85% of your Social Security benefits are subject to your regular income tax rates. But if you need help assessing your tax liability, consider speaking to a financial advisor with tax expertise.

It’s important to remember that your Social Security benefits may be taxable depending on your “combined income.”

As we mentioned above, the more combined income you have, the more of your benefits could potentially be taxed. If you collect $2,700 per month, that’s $32,400 per year in Social Security benefits, giving you a combined starting income of $16,200 ($32,400/2). If Social Security were your only source of income, you would not owe taxes on your benefits.

From there, taxes apply depending on your other sources of income. For example, let’s say you withdraw $50,000 from your 401(k). That would make your combined income $66,200 (50,000+16,200), meaning up to 85% of your benefits – $27,540 – would be taxable.

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