money Retirees still have to pay 'hidden' taxes on Social Security, expert says
After a lifetime of having Uncle Sam take Social Security taxes from their paychecks, many Americans are surprised to learn that those same entitlement benefits can be taxed during retirement.
“The taxation of Social Security income amongst all the other retirement income is kind of hidden,” Martha Shedden, executive director of National Association of Registered Social Security Analysts, told Yahoo Money. “A lot of people don't know that their Social Security income will be taxed."
When retirement planning and saving, Americans earmark their nest eggs for living expenses, travel, hobbies, or other expenses. But not all do so for taxes, which can apply to other retirement income aside from Social Security.
Read more: Here's how your retirement income is taxed
Households may forget that a portion of their nest eggs “will go into taxes and will be paid in taxes” and “not all of their savings will be available for consumption,” Anqi Chen, co-author and assistant director of savings research at the Center for Retirement Research at Boston College, told Yahoo Money.
How much do I have to pay?
How much retirement income you have will determine how much in taxes you'll pay. For instance, the highest quintile of retired households pays 11.3% on average on their retirement income, while the top 5% is taxed at 16.4%, and the top 1% is taxed at 22.7%, according to a recent analysis authored by Chen.
Not all retirees are taxed on Social Security. Based on Internal Revenue Service (IRS) rules, only certain Social Security beneficiaries pay taxes on up to 50% of benefits.
Those who pay federal income taxes on Social Security benefits derive substantial income from other sources, including wages, self-employment, interest, dividends, and other taxable income that must be reported on a federal tax return.
Read more: Here's how to get your retirement savings back on track
The IRS breaks it down based on annual earnings for individual filers and joint filers like this:
Individual filers with earnings between $25,000 and $34,000 can expect to pay income taxes on up to 50% of benefits. Those making more than $34,000 can expect to pay taxes up to 85% of benefits.
Joint filers making between $32,000 and $44,000, can expect to pay income tax on up to 50% of benefits. Married couples making more than $44,000 can expect to pay taxes on up to 85% of benefits.
Still, more people are taxed on Social Security than almost 40 years ago, according to Shedden, and "more than three times as many people are being taxed [for] their Social Security than there was 1983. So it sort of creeps up on people.”
Stephanie is a reporter for Yahoo Money and Cashay, a new personal finance website. Follow her on Twitter @SJAsymkos.
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