The IRS has implemented a formula to tax your retirement:
½ of your Social Security Benefits + your gross income (All sources) – your tax exemptions = Your number.
If your number exceeds $25,000 as a single filer ($32,000 as a joint filer), they will tax your social security income up to 50% according to any tax bracket they choose. Now, if that number exceeds $34,000 as a single filer ($44,000 as a joint filer), they will tax up to 85% of your social security benefits according to whatever bracket they choose.
By simply not understanding how Social Security works in retirement and how it will affect you specifically in your tax bracket, you may find yourself paying the IRS & forfeiting your standard of living. Also, whereas you may start taking social security benefits when you turn 62, taking benefits before your full retirement age results in a permanent benefits reduction — of as much as 25% to 30%, depending on your full retirement age. So, if you are planning on incorporating Social Security as part of your retirement, then you should also be prepared for the rules and risks of doing so.
Luckily, with smart planning you can reduce and possibly even eradicate all taxation to your Social Security Benefits if you prepare early enough.
