Reduce Taxes on Your Social Security Benefits
Wondering when to start taking Social Security? Read this first.
Many folks don’t think about the taxes they may have to pay on Social Security benefits. But chances are that you’ll probably have to pay taxes on at least half of your benefit amount.
(More bad news if you live in West Virginia, Vermont, Utah, Rhode Island, North Dakota, New Mexico, Nebraska, Montana, Missouri, Minnesota, Kansas, Connecticut or Colorado: you’ll have to pay state taxes on Social Security, too.)
But let’s just focus on federal taxes here. How much of your benefit will be taxable, exactly?
First, you’ll need to calculate your combined income. This is the total of all your income (except Roth IRA withdrawals — more on that in a minute), plus half of your Social Security benefits.
If you’re single and your combined income falls between $25,000 and $34,000, you’ll have to pay taxes on up to 50% of your Social Security income. If you are single and your combined income exceeds $34,000, then up to 85% of your Social Security benefits may be taxable.
If you’re married and the combined incomes of you and your spouse are between $32,000 and $44,000, you’ll pay taxes on up to 50% of your Social Security benefits. And, if you collectively earn more than $44,000, you may be taxed on up to 85% of your benefits.
How to reduce your taxes on Social Security income
- Learn about Roth IRA conversion strategies. Yes, you’ll have to pay taxes at the time of conversion. But when you withdraw the money from the Roth IRA later, it won’t be included in your taxable income.
- Ask your financial advisor about delaying the start of your Social Security benefits until you’ve spent down a portion of your pre-tax retirement accounts. That may help you avoid crossing the threshold that would increase the percentage of your taxable Social Security income. Delaying your Social Security benefits may also result in a higher benefit amount when you are eventually ready to start them.
- Track all your income sources in retirement. Pension payments, dividends, and interest from savings and investments, earnings from a part-time job, withdrawals from traditional 401(k)s and IRAs are all sources of retirement income that can contribute to making your Social Security payments taxable.
We have a few more ideas to help reduce the taxes you’ll pay on your Social Security benefits. Just drop us a note and we will be in touch.