3 Ways to Reduce Your Social Security Taxes
Reduce Income Tax on your Social Security and Get More Out of Retirement
According to the Social Security Administration, you will have to pay federal income tax on your social security benefits if you have other substantial income like wages, self-employment income, interest, dividends, and other taxable income that is being reported on your tax return in addition to your SSA benefits.
If you are filing as a single individual, to avoid taxes all together you have to report less than $25K a year in total income. This includes ½ of your Social Security benefits. If your total adjusted gross income is between $25K and $34K up to 50% of your benefits may be subject to tax . If your total income is above $34K then up to 85% of your benefits could be subject to federal income tax.
If you are filing married jointly, you and your spouse have to make a combined total of less than $32K a year to avoid federal income tax on your Social Security benefits. Up to 50% of your benefits are subject to federal tax if you both make between $32K and $44K. Earn more than $44K and up to 85% of your benefits are subject to federal income tax. With inflation pushing prices higher and higher, it is nearly impossible to live off of such a low income and avoid federal income tax altogether. So, it has become imperative to learn new ways to reduce your Social Security taxes.
Here are 3 Ways to Reduce Your Social Security Taxes Without Changing Your Lifestyle
1. Start Withdrawing from Your IRA or 401(k) Before You Begin Taking Social Security Benefits
For many retirement programs, the minimum age to begin drawing from your retirement account is 59 ½. In some cases, you can begin at age 55. There is no minimum to the amount you have to withdraw until the age of 70 ½. By taking money out of your retirement account earlier and waiting until you are 70 you can reduce the amount of money you will owe in taxes as your required minimum distribution will be lower. Waiting until 70 to begin receiving Social Security will also increase the amount of money you receive in Social Security benefits.
2. Donate Money to a Charity to Reduce Your Social Security Taxes
Many retirees are backed into a tax paying corner due to their required minimum distribution or RMD. All retirement accounts have a set RMD that takes effect at age 70 ½. However, to avoid having your Social Security benefits taxed, you can donate up to $100K a year of your RMD. This will keep you from paying taxes on this income but you have to donate to a verified and credible 501(c)(3) charity. Another rule is that you can’t use income from a 401(k) or other employer-sponsored program. You can circumnavigate this second rule by moving your qualified plans into an IRA.
3. Utilize a Roth IRA or Roth 401(k)
Taking advantage of this option does require a bit of pre-planning on your part. Both of these retirement programs will allow you to put money into them after your initial federal income tax has been paid. You don’t have to pay taxes when you receive the money like you would with a traditional IRA or 401(k). You will still want to receive your Social Security benefits and any other income, like dividends, until you reach your maximum threshold of $25K for individuals and $32K for a married couple. If you need any extra money then you will want to tap your Roth IRA or Roth 401(k), as there is no minimum balance, or taxes to be paid on those withdrawals.
Consult with a Tax Professional Before Deciding on Ways to Reduce Your Social Security Taxes
There are other ways to reduce your Social Security taxes like choosing tax-friendly investments or quitting your part-time job. Before you decide on which, if any, of these ways to reduce your Social Security taxes, you should speak to a licensed tax professional or retirement planner. They can help you decide which is the most beneficial direction to take your retirement.
Neddenriep Financial is a full-service wealth management firm available to help people in the Minden, Carson City, and Reno area. We might be the architect of your retirement plan, but you are the driving force behind it. Let us help you make the right decision for you. Our financial professionals are also available for investment planning and are experts in bonds, mutual funds, and annuities to help with long-term financial decisions.
Reduce Your Social Security Tax and Start Getting More Out of Your Retirement
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