Understanding the Tax Impact on Your Retirement Income

One of the key components of building a comprehensive financial plan is tax planning. When clients transition into retirement, tax strategy often becomes even more important—because income is drawn from multiple sources, and each can be taxed differently.

Among those income sources, Social Security is often one of the largest and most stable components of a retiree’s plan. While many people assume Social Security benefits are tax-free, that is not always the case. Understanding how these benefits are taxed is an important part of maximizing retirement income and avoiding unintended tax exposure.

As financial planners, we assist clients with developing a social security filing strategy that not only meets their cash flow needs but also takes into consideration tax strategies when retiree are trying to determine the optimal start date for their social security benefits.

Overview: Federal and State Taxation

Federal Taxation

Social Security may be taxable at the federal level depending on a retiree’s combined income. Up to 85% of benefits may be included in taxable income when certain thresholds are met.

The amount subject to tax is based on what is known as provisional income, which includes:

• Adjusted gross income (AGI)

• Non-taxable interest (e.g., municipal bond interest)

• 50% of Social Security benefits

Depending on your provisional income, benefits may be:

• 0% taxable

• Up to 50% taxable

• Up to 85% taxable

The percentage refers to how much of the Social Security benefit is included in taxable income—not the rate at which benefits are taxed. This calculation can create important planning opportunities around managing withdrawals, Roth conversions, and income timing.

State Taxation

While Social Security is taxed at the federal level, most states do not tax Social Security benefits.

However, a handful of states do impose state income taxes on all or part of Social Security benefits. Rules vary by state, income level, and filing status.

Because many retirees relocate or consider relocation in retirement, understanding state-level rules can be an important planning consideration.

Why Social Security Taxation Matters

Taxation directly affects:

• Overall retirement income picture

• Asset withdrawal strategy

• Roth conversion opportunities

• IRMAA (Medicare premium) thresholds

• Managing longevity risk in retirement

For example, retirees may unintentionally trigger higher taxation of benefits—or higher Medicare premiums—if withdrawals are not planned carefully. Coordinating income sources to manage provisional income may help reduce the amount of benefit subject to tax.

Thoughtful planning can help keep benefits more tax-efficient over time.

Social Security and Provisional Income

The provisional income formula means that planning must consider:

• Required minimum distributions (RMDs)

• Pension income

• Capital gains

• Dividends

• Municipal bond interest

• Roth conversion timing

Because many forms of income impact provisional income, even modest adjustments can shift a taxpayer into a higher Social Security tax tier. This is why it is essential to review taxation as part of an annual or ongoing retirement plan—not just once at filing.

Integrating Social Security Into Your Tax Strategy

We help clients evaluate how filing age and income management influence long-term tax outcomes. Considerations often include:

• Whether to delay Social Security to avoid have to pay higher tax rates while still working

• Coordinating timing of benefits with Roth conversions

• Strategic use of taxable vs. tax-deferred vs. Roth accounts

• Projecting future RMD-driven tax brackets

• Reducing risk of unexpectedly high Medicare premiums

Sometimes delaying Social Security until full retirement age or age 70 not only increases lifetime benefit value but also allows for lower-tax Roth conversions before benefits begin.

Other times, filing earlier makes sense when dependent benefits or 50% spousal benefits are taken into consideration.

No two households are identical, and optimal planning depends on total financial picture, spending needs, and longevity expectations.

Common Questions We Help Clients Answer

• Will my Social Security benefits be taxable?

• How can I reduce the portion of my benefits subject to tax?

• How do RMDs affect my Social Security tax exposure?

• Should I convert to Roth before taking Social Security?

• Does moving to another state reduce my tax liability?

• How do capital gains and dividends impact the taxation of my benefit?

Our Approach

At Greenbush Financial Group, we:

• Calculate expected provisional income

• Model tax outcomes using different filing ages

• Coordinate portfolio withdrawals to minimize taxation

• Integrate Social Security with Roth strategies

• Evaluate the impact of social security income on Medicare premiums

• Coordinate state-level tax implications where relevant

Our goal is not simply to maximize Social Security but to integrate it into a broader plan that supports long-term financial security and tax efficiency.

Next Step

If you are approaching retirement—or already receiving Social Security—understanding how benefits are taxed can help you make more informed decisions and potentially pay less in taxes over your lifetime when we factor in a retiree’s other income sources and assets that make up their total financial picture.

Thoughtful tax planning around Social Security can enhance lifetime income and minimize taxes paid.

Contact Us . . . .

All of our services start with a complimentary consult. No high pressure sales tactics. We are financial planners, not salesmen. Schedule Yours Today.

About Our Firm:  Greenbush Financial Group is an independent registered investment advisory firm based in Albany, New York, that provides four main services to clients: fee-based financial planning services, investment management, employer-sponsored retirement plans, and retirement planning services.  The firm serves clients locally in the Albany region and virtually across the United States.

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