Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement. Take a chunk of money out of your retirement account and pay the taxes on it. You can use it later on without pushing up your taxable income.
For example, you could withdraw funds a little earlyor “take distributions,” in tax jargonfrom your tax-sheltered retirement accounts such as IRAs and 401s. You can make distributions penalty-free after age 59½. That means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less in tax by making more withdrawals during this pre-Social Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and any other sources.
Be mindful, too, that at age 72, you’re required to take minimum distributions from these accounts, so you need to plan for those mandatory withdrawals.
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When Seniors Must File
For tax year 2020, you will need to file a return if:
- you are unmarried,
- at least 65 years of age, and
- your gross income is $14,050 or more.
However, if you live on Social Security benefits alone, you don’t include this in gross income. If this is the only income you receive, then your gross income equals zero, and you don’t have to file a federal income tax return.
But if you do earn other income that is not tax-exempt, then each year you must determine whether the total exceeds $14,050.
- For tax years prior to the 2018 tax year , these amounts are based on the year’s standard deduction plus the exemption amount for your age and filing status.
- Beginning in 2018, only your standard deduction is used since exemptions are no longer part of calculating your taxable income under the new tax law passed in late 2017.
For the 2020 tax year,
- If you are married and file a joint return with a spouse who is also 65 or older, you must file a return if your combined gross income is $27,400 or more.
- If your spouse is under 65 years old, then the threshold amount decreases to $26,100.
- Keep in mind that these income thresholds only apply to the 2020 tax year, and generally increase slightly each year.
How Much Of Your Social Security Is Taxable
Its possible and perfectly legal to avoid paying taxes on your Social Security check. In fact, only about 40 percent of recipients pay any federal tax on their benefit.
But heres the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds:
- $25,000, if youre filing as an individual
- $32,000, if youre married filing jointly
For married filing separately, the Social Security Administration simply says that youll probably pay taxes on your benefits.
Your combined income consists of three parts:
- Your adjusted gross income, not including Social Security income
- Tax-exempt interest
- 50 percent of your Social Security income
Add those amounts up and if youre under the threshold for your filing status, you wont be paying federal taxes on your benefit.
Even if youre above this threshold, however, you may not have to pay tax on your full benefit. You may pay taxes on only 50 percent of your benefit or on up to 85 percent of it, depending on your combined income.
- For individual filers:
- Combined income between $25,000 and $34,000, up to 50 percent of your benefit is taxable
- Combined income above $34,000, up to 85 percent of your benefit is taxable
When Social Security Is Not Taxable
You won’t owe federal tax on your Social Security benefits if your total income falls below the taxable thresholds set by the IRS.
You won’t owe state taxes on your benefits if you live in any of the 37 states that don’t tax this income. You can minimize the tax burden by adopting one of the strategies below.
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Buy An Annuity Contract
QLACs provide monthly payments for life and are shielded from the downturns of the stock market. As long as the annuity complies with IRS requirements, it is exempt from the required minimum distribution rules until payouts begin after the specified annuity starting date.
QLAC income can be deferred until age 85. A spouse or someone else can be a joint annuitant, meaning that both named individuals are covered regardless of how long they live.
Keep in mind that a QLAC shouldn’t be bought just to minimize taxes on Social Security benefits. Retirement annuities have both advantages and disadvantages that should be weighed carefully, preferably with help from a retirement advisor.
How To Pay Taxes On Social Security
If you owe taxes on your Social Security income, you can pay them in a few ways. First, you can pay them each Tax Day, just as you paid taxes when you were younger. You may also consider paying estimated taxes quarterly if you expect you may owe taxes.
Alternatively, if you expect your Social Security benefits to be taxable, you may want to withhold federal taxes from your payments, just like you did from your paycheck when you were working.
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How Much Tax Do I Have To Pay To Qualify For Social Security Benefits
Figuring out if you qualify for traditional Social Security retirement benefits isn’t as simple as making sure you’ve paid a certain dollar amount of Social Security taxes. Instead, the system uses Social Security credits to determine eligibility. To qualify for traditional Social Security retirement benefits, you must have earned 40 Social Security credits.
Starting in 1978, you could earn up to four Social Security credits per year by paying Social Security taxes. You earn credits based on your wages and self-employment income for the year.
In 2021, you earn one credit for each $1,470 in covered earnings. To earn the full four credits possible in 2021, you must earn at least $5,880. The amount to earn one credit may change from year to year and was lower in years before 2021.
Are My Social Security Benefits Taxable
That depends on your other income and benefits for the tax year, since Social Security benefits include monthly retirement, survivor and disability benefits. They dont include any supplemental security income payments, which are not taxable.
As a very general rule of thumb, if your only income is from Social Security benefits, they wont be taxable, and you dont need to file a return. But if you have income from other sources as well, there may be taxes on the total amount.
To find if your benefits may be taxable, start with whats called the base amount for your filing status, which is:
- $25,000 if you are single, head of household, or a qualifying widow
- $25,000 if you are married filing separately and lived apart from your spouse for the entire year
- $32,000 if you are married filing jointly
- $0 if you are married filing separately and live with your spouse at any time during the tax year
To find out whether your Social Security benefits are taxable, divide your total Social Security benefit amount by 2, then add all your other income . Compare the result to the base amount for your filing status. If your result is higher than the base amount for your filing status, youll probably be taxed on the total.
If youre married and file a joint return, both spouses must combine their incomes and Social Security benefits when figuring taxable amounts. This applies even if the spouse did not have any benefits.
I Live In One Of These Countries
To qualify for the treaty tax exemption the beneficiary must file form W-8-BEN and present it to the U.S. Social Security Administration.
- Note – if the form is not timely filed, or the treaty article is quoted incorrectly, then the payment may have excessive withholding.
After filing Form W-8-BEN, the non-resident alien can file form 1040NR to request the refund. Future withholding should be reduced once the W-8-BEN is on file. Note – 1040NR is required to receive prior withholding the Social Security administration cannot process the refund but it will accept the new form W-8BEN to reduce future withholding.
Ways To Avoid Taxes On Benefits
The simplest way to keep your Social Security benefits free from income tax is to keep your total combined income so low it falls below the thresholds to pay tax. However, few choose to live in poverty just to minimize their taxes.
A more realistic goal is to limit how much tax you owe. Here’s a rundown of three solutions:
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How To Claim Your Benefits
Self-employed individuals claim Social Security benefits via the same route as traditional employees. Workers can apply for benefits online or by calling the SSA.
Those who are at full retirement age or older may keep their benefits even if they continue to work and earn money. However, those younger than full retirement age will run into an income cap if they continue to work: The SSA will deduct $1 from a workers benefits for every $2 earned above $18,960.
For self-employed workers, income only counts when it is actually received , unlike a traditional worker who must report their income as wages earned. For example, if a self-employed worker earns income through a job in 2021 but does not receive the payment until 2022, the income should be reported in 2022. Conversely, a W-2 worker would report those earnings in 2021.
Will You Owe Here’s How To Know
If you file a federal tax return as an “individual” and your combined income is:
- Between $25,000 and $34,000: You may have to pay income tax on up to 50% of your benefits
- More than $34,000: Up to 85% of your benefits may be taxable.
If you file a joint return, and you and your spouse have a combined income that is:
- Between $32,000 and $44,000: You may have to pay income tax on up to 50% of your benefits.
- More than $44,000: Up to 85% of your benefits may be taxable.
And if you are married and file a separate tax return, you probably will pay taxes on your benefits.
When Does A Senior Citizen On Social Security Stop Filing Taxes
The IRS requires you to file a tax return when your gross income exceeds the sum of the standard deduction for your filing status plus one exemption amount. These filing rules still apply to senior citizens who are living on Social Security benefits. If you are a senior, however, you don’t count your Social Security income as gross income. If Social Security is your sole source of income, then you don’t need to file a tax return.
Rules For Parents Of Children Drawing Social Security Benefits
Generally, adults collect Social Security benefits, but a child can also collect benefits if a parent is retired, disabled or deceased. When you file your own income taxes, the obvious scenario is that you have to claim your own childs benefits on your own income taxes but this isnt the case. Generally, a child wont collect enough Social Security benefits to file, but if one-half his benefits, plus any additional income, exceed $25,000, youll have to file a separate return for your child. You likely won’t get a disability tax refund, but you will see a benefit if you don’t have to claim taxes on any SSI income you or your child receives.
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If You Earn Enough Money For Your Benefits To Be Taxable You Could End Up Paying The Highest Income Taxes In The Country
By Stephen Fishman, J.D.
Social Security benefits are tax free unless you earn too much income during the year. To know whether you might be subject to such taxes you have to figure your “combined income.” This is actually quite easy: Simply add one-half of the total Social Security you received during the year to all your other income, including any tax-exempt interest .
You’ll have to pay tax on part of your benefits if your combined income exceeds these thresholds:
- $32,000 if you’re married and file a joint tax return , or
- $25,000 if you’re single.
If a married couple files their taxes separately, the threshold is reduced to zerothey always have to pay taxes on their benefits. The only exception is if they did not live together at any time during the year in this event the $25,000 threshold applies.
This applies to all types of Social Security benefits: disability, retirement, dependents, and survivors benefits.
How much of your Social Security benefits will be taxed depends on just how high your combined income is.
Individual filers. If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you have to pay income tax on up to 50% of your Social Security benefits. If your income is above $34,000, up to 85% of your Social Security benefits is subject to income tax.
Once you start receiving Social Security benefits, to keep your income below the applicable threshold, or at least as low as possible, you should:
Do I Have To File Taxes When Receiving Disability Benefits
There is a saying that the only two things in life that are certain are death and taxes. As United States citizens, we are well aware of the fact that we pay taxes on the income we receive. In fact, a part of those taxes is what makes it possible for disabled workers to obtain Social Security Disability benefits. The question is, do Social Security Disability beneficiaries have to file taxes when receiving disability benefits and do they have to pay taxes on the Social Security Disability benefits that they receive?
Whether or not you actually have to file taxes when receiving Social Security Disability depends on how much income you receive and whether or not your spouse receives an income. If Social Security Disability benefits are your only source of income and you are single, you do not necessarily have to file taxes. Doing so, however, may be in your best interests such as the case with stimulus payments that you may not receive if you do not file taxes.
The general rule of thumb to follow is that you will have to pay federal taxes on your Social Security Disability benefits if you file a federal tax return as an individual and your total income is more than $25,000. If you file a joint return, you will have to pay taxes if you and your spouse have a total combined income that exceeds $32,000.
How To Report Your Social Security Income
Each January, you will receive a Form Social Security 1099, SSA-1099, that shows the total benefits you received for the previous year and the total amount you are required to report to the IRS on your federal tax return.
If you misplaced your form, you can download a copy by creating a free online account with the Social Security Administration.
You will report the amount in Box 5 of Form SSA-1099 and the total amount on line 6a of your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The amount considered taxable income depends on what other income you earned during the year, which you should note on line 6b of Form 1040 or Form 1040-SR.
Remember: The taxable amount of your benefits is based on your filing status and combined income. If you need to calculate the taxable amount of Social Security benefits, you can use this worksheet.