It’s one of the most common surprises retirees face: finding out that Social Security benefits may not be completely tax-free. If this is news to you, you’re not alone — and the good news is that a little planning can go a long way.
Your Total Income Is What Matters
Whether your benefits are taxable depends on your overall income picture. The IRS looks at your total income — including things like retirement account withdrawals, investment income, and part-time work — and uses that to determine how much, if any, of your Social Security is subject to federal tax. Depending on where your income falls, anywhere from none to a portion of your benefits could be taxable.
What Catches Retirees Off Guard
A few things tend to surprise people: required withdrawals from traditional IRAs and 401(k)s count toward that total, as does interest from savings accounts and any rental income. It adds up faster than most people expect.
What About New Jersey?
Here in New Jersey, there is some relief — the state treats Social Security more favorably than the federal government does, which is worth keeping in mind when you’re looking at the full picture.
The Best Time to Plan Is Before April
The best time to think about this isn’t April — it’s during the year, when there’s still time to make adjustments. How you time withdrawals, manage other income sources, and set up withholding on your benefits can all make a real difference. If you’re heading into retirement or already there and haven’t had this conversation with your tax preparer, it’s worth putting on the agenda sooner rather than later.