When planning your retirement, don't forget that in many instances, your Social Security benefits will be taxed. This year, about one in three people receiving Social Security payments faces taxation on those payments. A decade from now, almost half of the people receiving Social Security could owe taxes on their benefits.
To learn more about the taxability of Social Security benefits, visit www.irs.gov and review IRS Publication 915. This publication includes a detailed worksheet which will tell you exactly how much of your benefit will be taxable.
In a nutshell, the formula involves calculating your adjusted gross income (AGI) and adding non-taxable interest and one half of your Social Security benefits. If these three items exceed $25,000 for single taxpayers or $32,000 for married taxpayeres, up to 50 percent of the your Social Security benefits will be taxed. If those three items exceed $34,000 for single taxpayers or $44,000 for married taxpayers, up to 85 percent of your benefits will be taxable.
Special rules exist for taxpayers who are married but filing separate returns -- if a married taxpayer lived apart from their spouse all year long, taxation of Social Security benefits is calculated as if the taxpayer were single. If the taxpayer lived with a spouse during the year, the base amount is $0 (not $25,000 or $34,000) and up to 85 percent of benefits received could be taxable.
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