Nearly 97% of US citizens between ages 60 and 89 receive Social Security benefits. 2022 benefits averaged $1,614 per month or $19,368 for the full year. With the ever-rising cost of living, this income may not be enough to live on. Most retirees are forced to supplement their Social Security income with other income sources, which could increase taxes.
With careful planning, however, you may be able to lower the taxes you pay on your Social Security benefits. This post discusses the different ways to lower Social Security taxes.
Is Social Security Taxable?
Whether the IRS will tax Social Security benefits depends on your provisional income. Provisional income is a standard measure the IRS uses to determine whether income taxes should be deducted from a retiree’s Social Security benefits. The IRS calculates your provisional income by adding your gross income, tax-free interest, and 50% of Social Security benefits.
Generally, you won’t pay taxes if your income is below $25,000 and you file taxes as a single filer or head of household. Similarly, you will not owe taxes if combined income is below $32,000 and you file a joint return.
How Much Is Tax on Social Security Benefits?
You will pay taxes on Social Security benefits if you receive a provisional income of between $25,000 and $34,000 as a single filer. Beneficiaries who receive income amounts of between $32,000 and $44,000 and file jointly will also pay taxes.
The following is a summary of the IRS taxes on Social Security:
- For Individual Filers: If you are a single filer making $25,000 – $34,000, up to 50% of your Social Security income is taxable. Up to 85% is taxable when you make more than $34,000.
- For Married Filing Jointly: Up to 50% of Social Security benefits is taxable for married couples with combined income between $32,000 – $44,000 and filing jointly. When you make more than $44,000, the taxable amount of your benefit increases to up to 85%.
How Can You Lower Your Social Security Tax?
The following are some of the ways you can lower your Social Security tax:
Save Money in Roth IRA
A Roth IRA can help retirees save on Social Security taxes in retirement. Apart from having zero impact on the taxation of your Social Security benefits, Roth IRA withdrawals are also potentially tax-free. This implies that you avoid paying taxes on the amount when taking distributions.
If you have savings for traditional 401(k) or IRA, consider converting the savings into a Roth IRA to minimize the taxes on your Social Security income. You can convert any amount of your savings into eligible IRAs.
Donate Required Minimum Distribution to Qualified Charitable Organization
Donating your required minimum distribution to a charity can help you get into the Social Security tax-free zone. The donation may allow you to deduct the amount from your tax return AGI. However, you must meet eligibility requirements for the qualified charitable distribution rules. For example, you must be 70.5 years or older to pay the distribution directly from your IRA to a qualified charity.
Minimize Withdrawals from Your Retirement Plans
The money you get from your traditional IRA or 401(k) may count as income in the year you withdraw. Minimizing those withdrawals can help you get below the tax-free threshold. If you are not taking a required minimum distribution (RMD), consider taking money from your Roth IRA or Roth 401(k) instead to avoid receiving taxable income.
Set Up Social Security Tax Withholding
Older taxpayers can reduce their tax bill by setting up a Social Security tax withholding. This involves filing Form W-4V with the Social Security Administration to request that 7%, 10%, 12% or 22% of your monthly benefit be withheld for taxes.
You can also withhold taxes from other income, such as pension or IRA withdrawal, to avoid a big tax bill. Setting up a tax withholding is more convenient than paying a tax bill each quarter.
Minimize Income from Other Retirement Income Sources
As mentioned above, retirees receiving income from other sources in addition to Social Security must pay tax on a portion of their Social Security benefit. Some of the other sources of retirement income that could contribute to making your Social Security taxable include earnings from part-time jobs, pension payments, dividends and interests from savings or investments, and withdrawals from traditional 401(k)s. Minimize income from these sources to stay below the IRS taxable income thresholds.
Social Security retirees in 2023 could benefit from one of the most significant increases in benefits in decades. This increase is due to the expected Cost of Living Adjustment (COLA) in response to high inflation. However, COLA increases will push combined incomes over certain thresholds, resulting in higher taxes on Social Security income.
Fortunately, several strategies exist to lower or avoid taxes on your benefits. If you have more questions, schedule a free call or get started online below.
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