minimize taxation on social security income

Minimize Taxation on Social Security Income

Many retirees find out the hard way that social security income is taxable. But there are ways that you can minimize taxation on social security income. In this article, we will go over 5 ways to minimize such taxation.

Keep Income Below Thresholds

Social security income only becomes taxable if your income goes over certain thresholds. The calculation of income is the total of your adjusted gross income, nontaxable interest, and half your social security benefits. If you are single and your calculated income among is between $25,000 and $34,000, half of your social security income will be subject to taxation. If you are married the amount is between $32,000 and $44,000.

Once your calculated income goes above $34,000 for a single person or $44,000 for a married couple, then 85% of your social security income is subject to taxation. The taxation of social security benefits never goes over 85%. Keeping your calculated income below these amounts can help you to minimize taxation on your social security income.

Consider Taking Earlier Withdrawals from Tax Deferred Accounts

One potential strategy to minimize taxation on social security income is to take earlier withdrawals from tax-deferred accounts. This strategy utilizes these distributions to allow you to delay enrolling in social security. Which will give you an increased benefit when you do enroll. It will also give you lower balances in your tax-deferred accounts so that when your required minimum distributions are calculated, those amounts will be lower. This is key because taxation on social security income typically increases as retirees begin to take their required minimum distributions.

Utilize Roth IRAs

Roth IRAs offer a double benefit when it comes to minimizing taxation on social security income. First, any distributions taken after age 59 ½ and from an account that is at least five years old are tax-free. Second, Roth IRA distributions are not included in the formula that determines your income threshold for social security taxation. Utilizing tax-deferred accounts before filing for social security and Roth IRAs after filing for social security can help reduce your Roth IRAs will also give you flexibility as to withdrawal amounts, since you do not have to factor in taxes.

Take into Account Other Retirement Income Sources

When planning to reduce your taxation, you also need to take into account other sources of retirement income. This could include pensions, dividends, interest, and employment income. These will all count towards your income calculation. Due to this, you should weigh how they will all interact with taxes and plan their utilization accordingly.

Withhold Taxes from Social Security Income

If you are certain that your social security income is going to be taxed, then you may want to start withholding taxes. You can do this one of two ways. The first way is to make estimated tax payments to the IRS every quarter. The second way is the have taxes withheld from your monthly social security checks. You can choose between 7%, 10%, 12%, or 22% withholdings. Using either of these methods can help to reduce your tax burden at the end of tax season.

You Can Minimize Taxation on Social Security Income

With the proper planning, you can minimize taxation on social security income. If you need help implementing such a plan, meet with a qualified financial planner who can help you get started.

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