This article takes a look at 5 things retirees need to know about social security and taxes. If you wish to check out our detailed analysis of insights on social security benefits and taxes, you may go to 12 Things Retirees Need to Know About Social Security and Taxes.
5. You Can Reverse a Benefits Claim
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For those who decided to claim their Social Security benefits and then realized that they should have waited instead, the Social Security Administration allows for a one-time do-over. To initiate a withdrawal of Social Security retirement benefits, individuals must submit their request within the initial 12 months of commencing benefits, regardless of the age at which they began receiving them (which can be as early as age 62). However, all social security benefits received previously must be repaid in their entirety.
4. Partial Taxation: Not All Social Security Benefits Are Taxed
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As of January 2024, the average social security benefit is $1,860. For those who have social security as their sole source of income in retirement, they can expect to keep the full amount.
“A retiree with only Social Security income will pay no taxes on their benefits because Social Security by itself is not taxable”.
– David Globke, vice president of SFA Wealth Management
Social Security is taxable only when the combined income exceeds certain limits, as discussed above.
3. Tax Credits for Retirees: Maximizing Your Financial Benefits
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Retirees can enhance their financial well-being by capitalizing on tax deductions and credits. Exploring deductions for medical expenses, charitable donations, and mortgage interest can lower taxable income. Specific credits, like those for elderly or disabled individuals, offer direct reductions in tax owed. Maximizing contributions to retirement accounts further optimizes tax benefits.
2. Residency Impact: How Your State of Residence Affects Taxes
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Quite a few states that don’t tax social security, while there are yet others don’t tax retirement income at all. However, the retirees who live in states such as Connecticut, Kansas, Montana, Nebraska, and a few others, have a portion of their social security subject to state income taxes. Many of these states have different criteria from the federal government when taxing Social Security payments. They either have higher income thresholds, provide diverse deductions, or impose limitations on the taxation of benefits.
1. COLA Effects: Understanding the Impact of Cost-of-Living Adjustments
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The 8.7% Cost of Living Adjustment (COLA) last year gave a considerable bump to retirees’ social security beneficiaries. However, this COLA increased social security income for the average retiree by about $1,760 for the year. While this may have been good news for many, it pushed many others into a higher tax bracket.
“If inflation rises faster, Social Security benefits will be even higher in nominal dollars and more families will pay on more benefits — further reducing the net benefit,”
-Alicia Munnell, director of the Center for Retirement Research, and research associate Patrick Hubbard.
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