Understanding How It All Works

For some individuals, Social Security benefits may be taxable. Whether this is true for you is largely dependent upon your marital status, your total income and the tax filing status. What you can do to minimize your tax burden if your Social Security benefits are taxable is dependent upon putting certain strategies into place.  Let’s take a look at both.

Are Your Social Security Benefits Taxable?

Determining whether and how much of your Social Security benefits are taxable is a question of taking a careful look at several different factors. The first thing that you need to understand is exactly what we mean by Social Security benefits. For our purposes, we’re talking about the benefits you receive before taking out any payments that may be made for premiums for Medicare. It doesn’t matter why you’re receiving the benefits: regardless of whether you’re a recipient as a result of having reached the eligibility age, due to disability or as a result of having retired, they are still treated the same way. This is not true for Supplement Security Income, which are never taxable.

With that understanding, here are the basics regarding taxes and Social Security benefits:

  • They can be taxed up to 85% if you have significant income outside of your Social Security benefit
  • They will be taxed 85%, regardless of your income, if you are married and filing separately and lived with your spouse at all during the year. This tax was designed to act as a deterrent to having married taxpayers attempt to reduce their income on their tax return by filing separately.
  • They will not generally be taxed if Social Security benefits represent your only source of income

To take this a step further, you can perform a simple calculation to see whether your Social Security benefits are taxable, and if so what percentage of the will be. Start with the total amount of any other income that you receive. This includes all exclusions such as tax-exempt interest. Add to that one half of your total Social Security benefit.

Once you have arrived at this figure, compare it to the federal government’s base amount for the filing status that you use. If the number is higher than the published base amount, then you may be subject to taxation.

The current base amounts are:

  • Single, head of household, qualifying widows or widowers with dependent children and those married but filing separately who did not live with their spouses at all during the course of the year - $25,000
  • Married couples filing jointly - $32,000
  • Married couples who lived together during the course of the year who are filing separately - $0

How to Avoid or Minimize Having Social Security Benefits Taxed

There are a couple of strategies for minimizing or completely escaping having Social Security benefits taxed. The goal is to defer the income that gets combined with the Social Security benefits in the calculation shown above. This can be done by deferring income until another year, though the required minimum distribution rules can make this a challenge for those considering taking Individual Retirement Account (IRA) distributions.

What is important to remember is that different approaches will work for different scenarios – those who have significant holdings in an IRA and who can take their required minimum distribution without exceeding the base amount threshold have a real opportunity available to them.

The same is true for those who are not required to make withdrawals because they have not yet reached the age of 70.5. If you’d like more information on how to put these strategies to work for you, contact our office today to set up an appointment.

For information on how to minimize your Social Security tax, contact our office today at (909) 581-9235.