From Bob Irish, retirement expert, Palm Beach Research Group: The good news: You’re finally collecting Social Security benefits after a lifetime of paying into the system.

The bad news: Depending on your situation, 85% of your benefits may be taxable.
This can get very complicated. But basically, you’ll pay tax on your benefits if your “combined income” is above a certain level.

The Social Security Administration defines “combined income” as the total of three numbers:

  • Your adjusted gross income

  • Any tax-exempt income—this includes interest from municipal bonds or dividends from a municipal bond mutual fund

  • 50% of your Social Security benefits.

And here’s how your combined income affects the way your benefits are taxed:

Combined-Income Tax Rates

Are You a Single Filer?

Are You Filing Jointly?

Then This Is Your Taxable SS Income

Less than $25,000

Less than $32,000

SS income is tax-free



Up to 50% of SS income is taxable

More than $34,000

More than $44,000

Up to 85% of SS income is taxable

So, if, for example, you’re a single filer and your combined income is $26,000, a percentage of your benefits will be added to your taxable income for the year. And that may push you into a higher tax bracket. (Something we all want to avoid.)

These are the seven tax brackets for single filers in 2016. (You can find the tax brackets for joint filers here.)

Taxable Income

Tax Rate




$927.50 plus 15% of the amount over $9,275


$5,183.75 plus 25% of the amount over $37,650


$18,558.75 plus 28% of the amount over $91,150

$190,151-$ 413,350

$46,278.75 plus 33% of the amount over $190,150


$119,934.75 plus 35% of the amount over $413,350

$415,051 or more

$120,529.75 plus 39.6% of the amount over $415,050

In addition to your salary, your combined income includes the following:

  • Interest

  • Dividends

  • Taxable pension payments

  • Traditional 401(k) withdrawals

  • IRA withdrawals (except Roth)

  • Income from self-employment

  • Income from municipal bonds or muni funds

  • Any other taxable income source.

To help you do the calculation, the IRS provides a worksheet here.

Are you over a threshold? Then you’ll pay more taxes. Unless you can reduce your combined income. Here are some tips for doing that:

  • Consider converting a portion of your IRA to a Roth IRA. Withdrawals from Roth IRAs are not taxable and don’t figure into combined income. But be careful. This conversion is a taxable event and will increase your income in the year you do it.

  • If you need the income, consider selling a capital asset (like a stock) instead of taking a withdrawal from your IRA. An IRA withdrawal is considered ordinary income, and the sale of an asset may be taxed at a lower capital gains rate.

  • Consider getting a home equity line of credit (HELOC). Money withdrawn from a HELOC is not taxable, so you can make the withdrawal without putting yourself in a higher bracket. And when you pay off the HELOC, it might make sense to do it with an IRA withdrawal in a year when you aren’t close to a higher tax bracket.

  • If you’re close to a higher tax bracket, consider withdrawing funds from a Roth IRA first. A Roth withdrawal does not count in the combined-income calculation.

  • Consider lowering your dividend income by moving a portion of your portfolio into growth or non-dividend-paying stocks.

  • If you expect your income to decrease in the future, consider converting an investment that generates taxable income (such as a corporate bond portfolio) to a deferred annuity. You can turn on the income from the annuity later when you’re in a lower tax bracket. (You’ll find information on deferred annuities here.)

This is complex stuff. And everyone’s situation is different. Before deploying any of these strategies, I urge you to consult with a tax professional.

Editor’s Note: As Bob notes, there are plenty of off-Wall Street ways to increase your retirement income. We’ve found another way you could potentially increase your income that’s outside the markets… click here to learn more about this unique asset.