Minimizing Tax on Social Security Has An Income Factor
Often, people ask, “How do I go about minimizing tax on social security income?” Let’s face it, people make very little on social security income and it is only going to get harder and harder. How much (if any) of your Social Security benefits are taxable depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.
For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before any reductions due to payments withheld for Medicare premiums). For tax purposes, Social Security benefits are treated the same regardless of whether the benefits are paid due to disability, retirement, or reaching the eligibility age. Supplemental Security Income benefits are not included in these computations because they are not taxable under any circumstance.
Tax Filing Status as a Factor When Filing Social Security
The taxability of your Social Security benefits depends on your total income and marital status.
- When Social Security is your only source of income, it is generally not taxable.
- On the other hand, if you have other significant income, as much as 85% of your Social Security benefits can be taxable.
- When you are married and filing separately, and when you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable—regardless of your income. This is to prevent married taxpayers who live together from filing separately to reduce the income on each return and thus reduce the amount of Social Security income that is subject to tax.
Social Security Benefits Are Taxable up to 85%
The following quick computation can be done to determine if some of your benefits are taxable and could minimize your social security income tax:
Step 1. First, add half of your total Social Security benefits to your total other income, including any tax-exempt interest and certain other exclusions* from income.
Step 2. Then, compare this total to the base amount that is used for your filing status. Is the total is more than the base amount? Then some of your benefits may be taxable.
What are Tax Base Amounts?
The base amounts are:
$32,000 for married couples filing jointly;
$25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
$0 for married persons filing separately who lived together during the year.
Here is another way of minimizing tax on social security benefits. Taxpayers can defer their non-Social Security income from one year to another, such as by taking individual retirement account (IRA) distributions. When they defer SSI, they are be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits in a given year. However, the required-minimum-distribution rules for IRAs and other retirement plans have to be taken into account.
Maximizing IRA Distributions
Individuals who have substantial IRAs and who either aren’t required to make withdrawals or are making their post-age-70.5 required minimum distributions, they may be missing an opportunity for tax-free withdrawals. This is only the case when they aren’t withdrawing enough to reach the Social Security tax threshold. Everyone’s circumstances are different, however, and what works for one person may not work for another.
Do You Have Questions About Claiming Social Security Income on Your Taxes?
Don’t worry about minimizing tax on social security benefits. For any questions you have about how these issues affect your specific situation, please give this office a call at at 781.849.7200 or email us at firstname.lastname@example.org. For those who wish to do some tax planning, you can also book an appointment online here. Alex Franch is happy to answer any questions you have. But call soon because the tax filing deadline is coming quickly!
We would love to hear your comments below about your experience with the new Tax Law. Do you think you will make money or lose it in the future and why?
Alex Franch, BS EA
Alex is a Tax Specialist and Partner at Joseph Cahill & Associates / WorthTax. He has a diverse background including a Bachelor of Science from Boston College in Mathematics and extensive military service. Alex is an Enrolled Agent and has a decade of tax preparation experience. He is passionate about serving businesses with tax and financial planning strategies.
Mr. Franch is licensed by the Financial Industry Regulatory Authority (FINRA). He holds a Series 6, 63, 65, and 7, and by the Commonwealth of Massachusetts Division of Insurance.
Alex Franch is a registered representative of, and offers securities and investment advisory services through, Commonwealth Financial Network. He is a registered broker-dealer, Member FINRA/SIPC.