In Part 1, we explained how Social Security benefits are calculated.
In Part 2, we discussed the rules for spouses, ex-spouses, and survivor benefits.
This is Part 3 of our four-part Social Security series.
Even after you understand how Social Security works, other rules can affect how much you actually receive. One of the most common surprises is that Social Security benefits are not always tax-free.
Depending on your total income, a portion of your benefit may be included in your taxable income.
Because of this, decisions about retirement withdrawals, pensions, and other income sources can affect how much of your benefit you ultimately keep.
In estate planning, we often see tax rules reduce available income in retirement, which can affect how long savings last and how financially secure a surviving spouse may be.
Social Security Is Not Always Tax-Free
Many people assume Social Security benefits are not taxable. That is not always the case.
Depending on your total income, up to 85% of your Social Security benefit may be included in your taxable income.
This does not mean the benefit is taxed at an 85% rate. It means that up to 85% of the benefit may be counted as income when calculating your taxes.
In general, the higher your total income from all sources, the more of your Social Security benefit may become taxable, up to that limit.
Other income sources, such as retirement withdrawals, pensions, investment income, or wages, can increase the taxable portion of your benefit.
In simple terms:
Social Security is not always tax-free.
The more income you have from other sources, the more of your benefit may become taxable.
Retirement Withdrawals Can Increase Taxes
Many people begin taking money from retirement accounts around the same time they start Social Security.
Those withdrawals are often taxable.
When taxable withdrawals are added to your Social Security income, they can cause a larger portion of your benefit to become taxable as well.
Because of this, the timing of when you start Social Security and when you begin taking withdrawals can affect how much tax you pay each year.
This is one reason Social Security decisions should be considered as part of an overall retirement plan, rather than as a separate decision.
Taxes Can Change After the Death of a Spouse
Taxes can also change after the death of a spouse.
While both spouses are living, they often file a joint tax return. After one spouse dies, the surviving spouse typically files as a single taxpayer.
Single filers can reach higher tax brackets at lower income levels.
Because of this, a surviving spouse may pay more tax on the same amount of income, and a larger portion of Social Security benefits may become taxable.
This is another reason the timing of Social Security decisions can affect long-term financial security.
Why This Matters for Estate Planning
Taxes directly affect how much income is available during retirement.
If more tax is owed each year, more money may need to be withdrawn from savings to cover expenses.
Over time, larger withdrawals can reduce retirement accounts more quickly.
That can affect:
• how long retirement funds last
• whether additional planning is needed for long-term care
• how much may eventually pass to children or other loved ones
Social Security decisions do not only affect monthly income.
They also affect taxes, savings, and long-term planning for both spouses.
Coming Next
Part 4: Pulling it all together. How Social Security decisions fit into an overall estate and retirement plan.