What is Combined Income?
Combined income is a key factor in determining whether your Social Security benefits will be taxed and to what extent. The formula for calculating combined income is straightforward and includes the following components:
- Adjusted Gross Income (AGI): This includes income from wages, self-employment, interest, dividends, and other sources.
- Nontaxable interest: Income from sources like municipal bonds that are not taxed at the federal level.
- Half of your Social Security benefits: If you receive $20,000 in Social Security benefits, for example, $10,000 is added to your combined income calculation.
The Impact of Combined Income on Taxation
Once your combined income is calculated, it determines how much of your Social Security benefits will be taxed at the federal level. There are three potential outcomes based on your combined income:
- 0% Taxable: If your combined income is below the threshold, none of your Social Security benefits will be taxed. For single filers, this threshold is $25,000; for married couples filing jointly, it’s $32,000.
- 50% Taxable: If your combined income exceeds the threshold but is less than the higher limit, up to 50% of your Social Security benefits may be taxable. For single filers, the combined income range for this is between $25,000 and $34,000; for married couples filing jointly, it’s between $32,000 and $44,000.
- 85% Taxable: If your combined income surpasses the upper threshold, up to 85% of your Social Security benefits may be subject to federal taxation. For single filers, this occurs when your combined income exceeds $34,000; for married couples filing jointly, it’s when your combined income exceeds $44,000.
Why Combined Income Affects Taxation
The idea behind using combined income to determine the taxation of Social Security benefits is to ensure that individuals with higher income levels contribute to the federal tax system while providing relief to lower-income retirees who rely more heavily on their Social Security benefits.
How to Minimize Taxation of Social Security Benefits
While you can’t change your combined income, there are strategies to potentially reduce the taxability of your Social Security benefits. For example, you could consider lowering your taxable income by contributing to tax-deferred retirement accounts or converting some assets to Roth IRAs, where distributions are tax-free.
