How can I Avoid Taxes on Social Security Income?


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You may be aware that if you work while collecting benefits prior to hitting your full retirement age, it can mean you’ll get a reduced benefit. However, one of the Social Security mistakes that you can make is not knowing if you earn too much money, just by making withdrawals from some types of retirement plans, you also can also wind up owing income taxes on your Social Security benefits.

Money Talk News’s article from last December entitled “5 Ways to Avoid Taxes on Social Security Income,” reported that according to the Social Security Administration (SSA):

“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 (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).”

Whether you owe taxes on these benefits depends on your “combined income.” The SSA defines this as the sum of your:

  • Adjusted gross income
  • Non-taxable interest; and
  • Half of your Social Security benefits.

If you file an individual tax return and your combined income is between $25,000 and $34,000, you may owe income taxes on up to 50% of your Social Security benefits. If you make more, up to 85% of your benefits could be subject to taxes. If you file a joint return, and your combined income is between $32,000 and $44,000, you may owe taxes on up to 50% of your benefits. Go over, and up to 85% could be taxable. However, there are ways to reduce your income and lower — or even avoid paying — taxes owed on your Social Security benefits:

  1. Delay collecting benefits. If you wait to collect your Social Security benefits until your full retirement age (or beyond), it may be the simplest way to avoid paying taxes on your Social Security benefits—at least for a while. Waiting to file for benefits also means you will get a larger check each month once you finally do start receiving benefits.
  2. Don’t work or work less in retirement. Every dollar you earn doing part-time work can inch you a bit closer to owing taxes on your Social Security benefits. Don’t quit a job you enjoy or need, just to cut your tax bill. However, if it’s a low-paying job that’s no fun, you might be better off quitting so you can reduce your income in exchange for lowering or eliminating taxes on your Social Security benefits.
  3. Avoid municipal bonds. Many people buy municipal bonds to lower their tax bill because the interest earned from these types of bonds typically isn’t taxable. However, municipal bond interest is included in the formula that determines whether you pay taxes on your Social Security benefits.
  4. Withdraw money from a Roth. If you’ve saved money in a traditional IRA or 401(k), the IRS will want some of that during your retirement. After years of deferring taxes on those contributions, the bill is due when you start making withdrawals. The withdrawals will increase your combined income, which could make the difference in whether or to what extent your benefits are taxed. Withdraw only as much money as the government requires you to take each year (the required minimum distribution or RMD) and take any additional cash that you need from a Roth IRA or Roth 401(k), if you have one. No taxes are due on Roth distributions, and these withdrawals won’t affect your combined income. Keep in mind that RMDs don’t apply to Roth IRAs.
  5. Distribute your RMD to a charity. Giving money to charity can lower the chances that your Social Security benefit will be taxed. If you’re at least 70½, you can take up to $100,000 of your annual RMD, give it to a charity and avoid income taxes on the money. It’s called a qualified charitable distribution. Because this money isn’t taxed, it won’t boost your adjusted gross income. However, you must direct the money to a qualified 501(c)(3) organization, and you can’t use funds from a 401(k) or other employer-sponsored plan to make this type of distribution. There are workarounds but speak with an attorney.

Reference: Money Talk News (Dec. 22, 2019) “5 Ways to Avoid Taxes on Social Security Income”