For millions of seniors, Social Security is a retirement lifeline. But sometimes even small misunderstandings can be costly.
While you don’t need to know every detail of how the program works, knowing at least the basics of how your benefits are calculated can help you avoid any surprises in retirement.
These three factors are among the most commonly misunderstood aspects of Social Security, and knowing how they will affect your monthly payments can help you more easily maximize your retirement income.
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1. Your benefits may be subject to state and federal taxes
Even in retirement, you can’t escape income tax. Your Social Security checks may be subject to both state and federal taxes, but the exact amount you pay (or whether or not you owe taxes) will depend on a few factors.
State taxes will depend on where you live, and the good news is that the majority of states don’t tax Social Security. Even among those who do, there are often exemptions based on age or income. Since each state has different regulations, it’s best to check your state’s tax code to see if you’ll have to pay taxes on your benefits.
Federal taxes affect everyone and depend on a figure called “provisional income” – which is half of your annual Social Security benefit plus your adjusted gross income (such as 401(k) withdrawals) and non-profit interest. taxable.
| Percentage of your benefits subject to federal taxes | Provisional income for single filers | Provisional income for married couples filing jointly |
|---|---|---|
| 0% | Less than $25,000 per year | Less than $32,000 per year |
| Up to 50% | $25,000 to $34,000 per year | $32,000 to $44,000 per year |
| Up to 85% | More than $34,000 per year | More than $44,000 per year |
Source: Social Security Administration.
The only way to avoid paying federal taxes is if your provisional income falls below $25,000 per year (or $32,000 per year for married couples). But regardless of your income, you won’t pay federal tax on more than 85% of your benefit amount.
2. Your benefit will not increase once you reach full retirement age
The age at which you file for Social Security will have a huge impact on the amount of your benefits. If you file your declaration before full retirement age (FRA), your monthly payments will be reduced by up to 30%.
However, many people mistakenly believe that if they file early, their benefit amount will automatically increase once they reach their FRA. In fact, about half of American adults believe this to be true, according to a 2023 survey by the Nationwide Retirement Institute.
In reality, your benefit amount is usually locked in for life once you start filing a claim. It is therefore particularly important to think carefully about the age you declare. While filing early isn’t necessarily a bad idea, you’ll receive smaller checks for the rest of your life.
3. The length of your career affects the amount of your benefits
Another often misunderstood factor is how your career affects your monthly payments. More than 60% of American adults are unaware that working for less than 35 years will result in a reduction in their monthly payments, according to the Nationwide survey.
The Social Security Administration calculates your benefit amount by taking the average of your salary over the 35 highest-earning years of your career. This number is then analyzed according to a complex formula to account for cost of living changes, and the result is the amount you will receive for filing it with your FRA.
If you have not worked a full 35 years before you start applying, zeros will be added to your average salary to account for the time you were not working. This will lower your average, resulting in a lower benefit amount.
Social Security can be complicated and confusing, and it can be difficult to understand all the factors affecting your benefits. But having at least a basic understanding of how the program works can make preparing for retirement easier.
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