Understanding Social Security Benefit Taxation as an AbbVie Executive

Receiving Social Security benefits is advantageous in retirement, but like almost every other form of income, these benefits are taxed by the government. When you retire from Abbvie, you'll be receiving your AbbVie pension, potential payments from your Deferred Compensation Program, along with your Social Security benefits. All of these items are taxed at income rates, so it makes to know how each of these will hit your tax return. To accurately predict your retirement income (and taxes), it’s important to understand how Social Security benefits are taxed.

Here, we explain everything you need to know about Social Security benefit taxation.

How are Social Security Benefits Taxed?

While Social Security benefits are a vital source of income for many retirees, a portion of these benefits may be subjected to federal income taxes. The Internal Revenue Service (IRS) uses a formula—known as the provisional income formula—to determine the taxable amount.1

Provisional Income Formula

An individual’s provisional income is calculated by adding together their adjusted gross income (AGI), their nontaxable interest, and one-half of their Social Security benefits. The resulting amount is compared to specific thresholds to determine the portion of the benefits that will be subject to taxation.

Taxation Thresholds

The thresholds that determine whether Social Security benefits are taxable are as follows:1

  • Single filers with a provisional income between $25,000 and $34,000 may have up to 50% of their benefits subject to taxation.
  • Single filers with a provisional income exceeding $34,000 may have up to 85% of their benefits subject to taxation.
  • Married couples filing jointly with a provisional income between $32,000 and $44,000 may have up to 50% of their benefits subject to taxation.
  • Married couples filing jointly with a provisional income exceeding $44,000 may have up to 85% of their benefits subject to taxation.

It’s important to note that these thresholds are not adjusted for inflation, which means that the benefits of more retirees may become subject to taxation over time. If you've been working at AbbVie for some time, you'll notice that your pension income alone will push you above the higher income threshold for Social Security benefit taxation. This makes it important to time your Social Security election period (age 62-70) with the rest of your income.

State Taxes on Social Security Benefits

In addition to federal taxes, some states also impose taxes on Social Security benefits. However, the rules and exemptions vary from state to state. Currently, twelve states tax Social Security benefits to some extent, while the remaining states do not impose state taxes on these benefits.2

Strategies to Minimize Social Security Taxes

There are several strategies that you can implement to potentially reduce the taxes on your Social Security benefits. Here are a few:

Diversify Your Retirement Income

Diversify your sources of income during retirement. By relying on a combination of Social Security benefits, retirement savings, and other investments, you may be able to reduce your provisional income and lower your tax liability.

Consider Delaying Benefits

Delaying your Social Security benefits can increase the amount of your monthly payment. This strategy can also help you push back the taxation of your Social Security benefits if you anticipate being in a higher tax bracket in the future. For most of my clients, they have enough retirement income to meet their needs, so I encourage them to push their Social Security benefits to the latest age - age 70.

Create a Withdrawal Strategy

Strategically managing withdrawals from your retirement accounts can help optimize your tax situation. By taking distributions from taxable accounts instead of tax-deferred accounts, you can potentially minimize your provisional income and reduce the taxation of your Social Security benefits.

Understand State Tax Laws

If you live in a state that taxes Social Security benefits, familiarize yourself with the rules and exemptions that are specific to your state. Consulting with a tax professional can provide valuable insights into how to minimize your state tax obligations. You may also want to take the different state tax laws into account when you are deciding where you will live when you retire.

As the famous saying goes, there are only two guarantees in life: death and taxes. Social Security benefits aren’t exempt from taxes, and understanding how your benefits will be taxed will help you form an accurate retirement income planning strategy.

If you're looking for guidance in how to design your retirement income strategy with your AbbVie benefits, let's chat. Use the "Schedule" button in the menu to find as time that suits your needs.

  1. https://www.ssa.gov/benefits/retirement/planner/taxes.html
  2. https://www.aarp.org/retirement/social-security/questions-answers/which-states-do-not-tax-social-security-benefits.html