Once you retire, you want the lowest tax burden possible since every dollar matters. This misconception is plausible since benefits were not taxed before 1983. The Senior Citizens League found that nearly half of 2021 Social Security recipients paid taxes.
The amount of additional money you bring in during this year will determine the potential tax liability that you owe. (Source: Millitary.com)
Tips to Minimize Your Social Security Benefits Tax
You can now protect your benefits from the tax collector. First, calculate your combined income, which includes your adjusted gross income (AGI), non-taxable interest, and 50% of your Social Security payments, to determine if your benefits are taxable. If you’re married and filing jointly, add half of your Social Security benefit and half of your spouse’s to your AGIs plus non-taxable interest to compute your total combined income.
Taxes will apply to 50% of benefits if: If you file as an individual with a combined income of $25,000 to $34,000, or jointly with your spouse with $32,000 to $44,000; taxes will apply to 85% of benefits if: If your combined income exceeds $34,000 as an individual or $44,000 if filing jointly with your spouse.
These levels are low, so you’ll likely pay taxes. Even more incentive to consider the five tips below.
- Make tax-deductible IRA contributions
You may minimize your AGI by contributing to an IRA. Your IRA contributions may be tax-deductible depending on your income, tax filing status, and 401(k) participation. The 2023 contribution ceiling for such accounts is $6,500, but 2024 is unknown. For those over 50, you can contribute $1,000 to “catch up,” bringing your cap to $7,500.
- Withdraw from your Roth IRA and 401(k) first.
Since Roth IRA and Roth 401(k) donations aren’t tax-deductible, withdrawals are tax-free if you’re over 59.5 and the account has been open for five years. Thus, withdrawals don’t affect AGI. Thus, withdrawing from these accounts before regular retirement accounts, which are taxed, can reduce taxes. If you can live upon Social Security and Roth account income, you can escape retirement income taxes.
- Delay Social Security and use taxable income
One approach to avoid Social Security taxes for a while is to not collect them. Instead, use IRA and 401(k) withdrawals for early retirement. These money will be subject to income tax, but they could boost your Social Security payments and lower your AGI. You can claim Social Security payments at 62, but waiting until full retirement age—66 or 67, depending on your birth year—will increase your benefit by 30%. Every year you wait filing for benefits until 70 raises your monthly payout.
Withdrawing from non-Roth retirement accounts reduces their balances, which lowers the required minimum distributions (RMDs) you must withdraw at a legally specified age (72 or 73, depending on your birthday and birth year). Lower RMDs could lower AGIs below Social Security tax levels.
- Maximize tax efficiency
Consult your financial adviser to handle your retirement investments tax-efficiently. Through “tax-loss harvesting,” selling stocks at a loss offsets capital gains earned elsewhere, lowering taxable income and AGI.
- Donate RMDs to charity
Donating RMDs to charity avoids counting them against your AGI if you don’t need them. Taxing your Social Security payment can be unpleasant, especially if you’re seeking to extend your retirement income. Consult your financial adviser about ways to decrease taxes and maximize benefits.
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