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Income Taxes And Your Social Security Benefit
Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits .
You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service rules. 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 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
The Value Of Your Spouse’s Benefit Depends On When They Choose To Collect
Spouses and ex-spouses are eligible to receive a Social Security benefit on their partner’s work record. The Social Security administration calculates whether an individual receives more benefits from their own work record or from their spouses’ work record, automatically giving out the higher benefit.
The spousal benefit is worth up to 50% of the higher-earner’s benefit. You must be at least age 62 to receive the spousal benefit, and you can only earn it once the higher-earner has started collecting their benefit.
In order to maximize the spousal benefit, individuals should wait until they reach full retirement age to collect it. At full retirement age, a spouse can earn 50% of the higher-earner’s benefit. If you decide to collect before full retirement age, your benefit will be reduced by a certain percentage for every month prior to full retirement age.
Furthermore, whether a higher-earner chooses to collect their benefits at or before full retirement age has no impact on the value of the spousal benefit. This means that a spouse can earn up to 50% of the higher-earner’s benefit, regardless of whether the higher-earner waits until full retirement age to collect.
For example, if the higher-earner collects before their full retirement age, like at age 64, their spouses’ benefit at full retirement age is still equal to 50%, says Kiner.
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Is Social Security Taxable
Yes, Social Security may be taxable. But the portion of benefits that are taxed depends on a person’s filing status and provisional income.
There are two steps in determining whether your Social Security benefits are taxable and at what rate:
Provisional income for a single, head of household, qualifying widow, or married but separate filer
Provisional income for a married, joint filer
Amount of Social Security benefit taxed
More than $44,000
Up to 85% of Social Security benefit taxed at filer’s marginal tax rate
Note: Married couples who file taxes separately but lived together at any time during the tax year are taxed on up to 85% of their Social Security benefits regardless of their income level.
Buy An Annuity Contract
A qualified longevity annuity contract is a deferred annuity funded with an investment from a qualified retirement plan or an IRA. QLACs provide monthly payments for life and are shielded from stock market downturns. As long as the annuity complies with IRS requirements, it is exempt from the RMD 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 shouldnt be bought just to minimize taxes on Social Security benefits. Retirement annuities have advantages and disadvantages that should be weighed carefully, preferably with help from a retirement advisor.
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How Much Of Your Benefits Are Taxable
The amount of Social Security benefits that are taxable depend on the extent to which your income plus half of your benefits exceed certain base amounts. There are 2 possibilities:
- 50% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half of your benefits exceeds these base amounts:
- $25,000 if single, head of household or qualifying widow
- $25,000 if married, filing separate and lived apart from spouse all of the tax year
- $32,000 if married, filing jointly
- NOTE: These base amounts are the same ones described earlier.
- 85% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half your benefits exceeds these adjusted base amounts:
- $34,000 if single, head of household or qualifying widow
- $34,000 if married, filing separate, and lived apart from spouse for entire year
- $44,000 if married, filing jointly
- $0.00 if married, filing separate and lived with spouse at any time
- NOTE: The adjusted base amount essentially allows the IRS to tax more of your Social Security benefits as income goes up.
Control Your Taxes Now & Later
The longer you wait to claim Social Security benefits, the better chance you’ll have to boost the overall tax efficiency of your retirement income plan. Here’s how.
Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.
The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions .
Since your RMD is considered ordinary income, having smaller distributions while you’re collecting benefits may reduce the taxes on your benefitsor keep you from paying taxes altogether.
In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.
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State Taxation Of Social Security Benefits
In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Missouri, for instance, taxes Social Security benefits only if your income is at least $85,000, or $100,000 if you’re married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.
Although you can’t have state taxes withheld from your Social Security benefits, you generally can make estimated state tax payments. Check with the state tax agency where you live for information about the your state’s estimated tax payment rules.
Minimize Withdrawals From Your Retirement Plans
Money that you pull from your traditional IRA or traditional 401 will count as income in the year that you withdraw it. So if you can minimize those withdrawals or even not withdraw that money at all, it will help you get close to the tax-free threshold. Of course, this may not apply if youre forced to take a required minimum distribution that pushes you over the edge.
If youre not forced to take an RMD in a given year, consider taking money from your Roth IRA or Roth 401 instead and avoid generating taxable income.
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How Much Is Taxable
Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.
- The total of one-half of the benefits and all other income is more than $34,000 .
- You are filing Married Filing Separately and lived with your spouse at any time during the year.
Who is taxed. Benefits are included in the taxable income for the person who has the legal right to receive the benefits.
Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher, age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion of the benefits received, Lisa uses only the amount paid for her benefit.
The amounts paid for Christopher and Michelle must be added to each childâs other income to see whether any of those benefits are taxable to either of the children.
Withholding. You can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Request.
The Impact Of Roth Iras
If youre concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401 plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.
So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA wont count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.
Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. For 2021, you can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.
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How To Reduce Your Social Security Tax Liability
If you expect you may owe taxes on your Social Security benefits, there are a few things you can do to potentially minimize them.
- Reduce business profits: If you own a business, you can reduce your tax liability by taking advantage of business tax write-offs you may be entitled to.
- Limit retirement withdrawals: You may also want to consider reducing your withdrawals from retirement income to reduce your tax liability, but you should consider the required minimum distribution rules while doing so. If you dont withdraw at least a minimum from most taxable retirement accounts after age 72, you may actually increase your tax burden.
- Sell capital assets strategically: If you own capital assets, such as stocks, bonds or real estate, you should discuss with a tax professional the best time to sell your assets. Any capital assets sold at a loss can reduce your overall income. Any assets sold at a gain may be subject to capital gains taxes, depending on how long you held them.
Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax
Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.
There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
payments sent by the Social Security Administration are not taxable.)
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Are Your Social Security Benefits Taxable
If your only income for the year was Social Security or Railroad Retirement benefits, those benefits will generally not be taxed. However, since very few people can survive on that amount of income, chances are you have other sources that may result in your Social Security benefits being partially taxed.
These are the steps for determining taxability:
- Add up your total income. This includes interest and dividend income, taxable pensions, other investment income, wages from part-time or full-time work plus tax-exempt interest income, excludable interest income from U.S. savings bonds, and excludable foreign-earned income.
- Decide what your base amount is , depending on your filing status:
- $25,000 if single, head of household or qualifying widow.
- $25,000 if married, filing separately, and lived apart from your spouse for all of 2008.
- $32,000 if married, filing jointly.
- Add your income plus half of your Social Security benefits. If that total amount is more than your base amount, some of your benefits will be taxable. Joint filers Take note! If you are married and filing jointly, you must combine your incomes and benefits to determine if your combined benefits are taxable. This is true even if your spouse had no Social Security benefits. If he/she had income, it must be added to “total income” to see if you exceed your “base amount”.
Calculating Your Provisional Income
The basic calculation to figure out what portion of your Social Security income is taxable isnt difficult, but first you have to figure out your provisional income. Aside from filing status, the biggest factor in figuring out Social Security benefit taxes is your income level outside of Social Security benefits.
Provisional income is defined as your adjusted gross income plus nontaxable interest. Nontaxable interest is interest income that is tax-exempt but you would still report on your federal tax returns. Your provisional income includes pensions, wages, interest, dividends and capital gains.
For example, assume your adjusted gross income is $12,000, you are paid $5,000 in nontaxable interest, and you receive $20,000 in Social Security benefits. By halving your Social Security income and combining those values, you would calculate that your provisional income is $27,000 .
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Keep Some Retirement Income In Roth Accounts
Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means that theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax freeprovided that theyre taken after you turn age 59½ and have had the account for five or more years. The Roth payout wont affect your taxable income calculation and wont increase the tax that you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.
The Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes that you owe on your Social Security benefits. A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.
How To Reduce Social Security Taxes
Social Security is taxable for most Americans, but there are ways to minimize the amount of taxes you pay, including some retirement account strategies. Although its likely not reasonable to try and stay below the taxable thresholds, as the figures are close to the poverty line in many states, it does make sense to reduce taxable income.
Here are a few things you could do to limit the amount you pay:
Withdraw traditional IRA and 401 retirement account funds before retirement or before taking Social Security income so its not factored into provisional income. You can take penalty-free withdrawals from IRA and 401 accounts at 59 1/2 years old, while Social Security benefits arent paid in full until you turn 67.
If feasible, consider moving to a different state. Most states dont tax Social Security income, but 13 do, as listed above.
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