Wages, interest, non-qualified dividends, and pension income are all figured into your modified adjusted gross income, which in turn is used to determine whether you cross the federal tax threshold on Social Security benefit income. These sources of income, plus the taxable portion of your Social Security benefits, are taxed as ordinary income. In other words, they’ll be treated just like wages. Your federal tax liability depends on which tax bracket you’re in.
It’s important to note that qualified dividends are not taxed in the lowest two tax brackets, and they are taxed as long-term capital gains in higher brackets. Long-term capital gains are usually taxed at a lower rate than ordinary income. Most of the dividends you’ll receive from big companies like Ford and Coca-Cola are qualified dividends. Income from these dividends will not count toward your modified adjusted gross income, which in turn won’t be factored into the federal tax threshold on Social Security income.
Although we aren’t certified financial planners, we strongly recommend structuring some or most of your retirement investments to take full advantage of the tax break you get from qualified dividends. Talk with your financial advisor about these investments for your retirement portfolio. It’s possible for you to pay little or no tax on your Social Security and your investment income!
Many retirees work. As noted, wages are taxed as ordinary income and thereby impact on whether (and how much) Social Security income is taxed. Usually, these same retirees have fixed income accounts that generate interest income or income from non-qualified dividends. Both are taxed at your marginal income tax rate, just like wages. The tax bite from federal and state taxes can put a serious dent in your Social Security and retirement investment income. Tax minimization through strategic investing can maximize your Social Security benefits.