Minimizing Tax On Social Security Benefits

Social Security Tax 101

How much your Social Security benefits are taxed depends on your total taxable income and whether you are married. If Social Security is the only money you have coming in, that money is often not taxed. On the other hand, if you get a large amount of money from sources other than Social Security, up to 85% of your Social Security earnings may be subject to taxation. To further understand this, set up a free YokeTax consultation. 

Eighty-five percent of your Social Security benefits, regardless of your income, are taxable if you are married, reside with your spouse at any point during the year, and file a separate tax return from your spouse under the "married filing separately" status. If you are single and use the single filing status to file a separate tax return from your spouse, then only 15% of your Social Security benefits are taxed. This is done to stop married taxpayers who live together from filing separately, which would lower the amount of income reported on each return and the amount of taxable Social Security income.

To figure out if some of your benefits are taxed, you can quickly do the following calculation:

First, add all of your other income, such as your tax-free interest and any other sources of income that are not taxable, to the sum of your Social Security payments, then deduct from this sum any nontaxable income you may have received.

Once you have this sum, you may use it to see how it stacks up against the filing threshold. If the total exceeds the minimum, some of your benefits may be subject to taxation.

The base amounts are:

• $32,000 for a tax-filing married couple;
• $25,000 for non-married individuals who did not live with their spouse at any point during the year (including singles, heads of household, eligible widows/widowers with dependent children, and married individuals filing separately)

Careful planning of "other" income, like withdrawals from an Individual Retirement Account (IRA) for at least one of the years can help avoid or at least lower the tax on Social Security benefits. But you must consider the minimum distribution rules for your IRA and other retirement plans.

People who have big IRAs but aren't required to withdraw from them, or who withdraw only the required minimum after age 72 but not enough to reach the Social Security taxable threshold, may not be taking advantage of tax-free withdrawals that they are eligible for. Since everyone's circumstances are unique, what works for one person may not work for another.

Gambling Tax Gotcha

An increase in a taxpayer's adjusted gross income (AGI) for the year is likely the result of any gross winnings accrued from gambling activities. This is because winnings from gambling are counted as income in their entirety, whereas losses can be deducted as an itemized expense. Even if you lose more money gambling than you win, your winnings are counted toward your AGI, and your losses are deducted as an itemized deduction. A greater portion of your Social Security payments may be subject to taxation. This is the case regardless of whether or not your losses are greater than your winnings.

Is Income from Social Security Taxed?

The federal government does not often levy taxes on the Social Security benefits of retirees with low incomes or whose main source of income is Social Security. The average monthly Social Security benefit for retired workers was $1,547 in January 2021, which worked out to $18,564 for the entire year. This amount is much lower than the taxable threshold of $25,000 that the federal government has established for an individual.

According to the Social Security Administration, however, around forty percent of people who receive Social Security benefits must pay federal income tax on a portion of their payment. Since Social Security taxes are not being increased annually as a result of income thresholds, a growing number of retirees will be required to pay taxes on their Social Security payouts over their retirement years. This is a consequence of the fact that Social Security taxes are not indexed for inflation.

Here are some strategies for minimizing or evading taxation of your Social Security check:

• To minimize your tax liability, keep your income below the applicable limits.
• Don't forget about your other retirement income sources.
• Before applying for Social Security, you might want to withdraw money from your IRA.
• Start saving with a Roth IRA.
• Consider the tax structures of different states.
• Establish a system to deduct taxes from Social Security payments.

If you have more questions on Social Security taxation and benefits, contact YokeTax for a free consultation.