You’ve paid into social security for almost all of your working years, and you’ve also paid income tax depending on your level of income. So, when you get to the time when you can start receiving your social security benefits you may be wondering if you need to pay tax on them and exactly how much you’ll be paying.
Here’s what you need to know about social security benefits and taxes.
Is There An Age Limit Where Social Security No Longer Taxed?
The short answer is no, there is no age when social security benefits are no longer taxed.
However, when you reach the age of 65 or 67, depending on the year you were born in, there is a regulation that states your social security payments can no longer be withheld even if, when combined with your other forms of income, you exceed the maximum threshold.
Do I Have To Pay Taxes On Social Security?
In short yes, but not everyone is going to pay the same amount of taxes. There are different levels of taxation depending on an individuals total income and how they file their taxes.
For example, for people who make a total gross income – including their social security payments – of $25,000 or more will be taxed up to 50% income tax on just their social security payment amounts.
If it is a couple who is filing, then the joint income total will be bumped up to $32,000.
If a single person is earning up to $34,000, or a couple is earning $44,000, then they could be taxed up to 85% of their social security payment amounts.
In most cases, those who have a very low total income household when they retire will be the only ones who are exempt from any form of tax on social security income tax.
An interesting point to note, though, is that social security payments have been subject to income tax payments since 1983. However, the threshold for those who have to pay the tax has not been adjusted since then so the majority of people who receive social security payments do end up paying some type of income tax on them.
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Do Seniors Pay Taxes On Social Security Income?
When people are in their working years, many individuals and couples will have multiple ways of saving for retirement so that they have private funds and do not have to rely on social security income benefits when they get to retirement age.
Depending on their financial situation, some people may be just as well off financially in their retirements years as they were in their working years because they were able to put a plan together.
As they start to withdraw the funds from their retirement accounts, this could count as taxable income that individuals or couples need to claim.
With that in mind, social security benefits would be added to their income for tax purposes. So asking if seniors will have to pay taxes on their social security benefits really depends on the financial situation of the person or couple in question.
For seniors who have a low income household, they may not have to pay any taxes on their social security benefits while people who have saved a lot for retirement and have other forms of income may have to pay up to 85% of their social security payment in tax.
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How Is Tax Calculated On Social Security Income?
When it comes to social security income, the level of taxation is very similar to any other form of income someone may have. When an individual files taxes, they have to submit their adjusted gross income, which would include income from social security and all other forms of income they may have.
Now if that total adjusted gross income exceeds the threshold set forth by social security then at least 50% of your total social security benefits would be considered taxable income for the individual or couple filing.
This amount will be considered when filing your taxes so your accountant can figure out how much income tax you will need to pay.
If your total gross adjusted income does not exceed the threshold then it could be that none of your social security income would be considered taxable income.
How Can I Avoid Paying Taxes On Social Security Benefits?
While it is generally not advisable to consider ways you don’t pay taxes on income, social security benefits may be a special consideration so that you are not paying taxes on the income – yet.
Delaying receipt of social security benefits
This option allows you to postpone your benefits until you actually retire.
When you reach full retirement age, you have the option to file for benefits but to not start receiving the payments yet. You can postpone paying taxes on this income until you actually start receiving the income.
As an added benefit, you would accumulate delayed retirement credit which means your benefit amount will increase once you do start collecting the benefits.
As an example, when your full retirement age is 66 your benefit amounts will increase by 8% each year that you delay receiving them until you turn 70 years old – which is the oldest age you can delay benefits until.
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Another way that you may be able to avoid paying tax on social security payments is to keep some funds in a Roth IRA or Roth 401(k). The contributions to these accounts are always made with after-tax dollars which means they will not be taxed when the funds are withdrawn.
As long as you take out the money after you are 59 ½ years old, or older, and you’ve had the account for at least 5 years then you don’t have to pay taxes
This payout will not increase your taxable income so you don’t need to worry about it counting against your income for tax time. It also could mean that you get to keep more of your social security benefits and they will not be subject to tax.
If your funds are in a traditional IRA or 401(k) then the income you withdraw from them would be subject to tax when you take out the money, so it could push your income level over the threshold for social security benefits.
Withdraw Taxable Income Prior To Retiring
There is another way you can easily minimize the amount of taxes you may have to pay on your social security payments, and that is to maximize – or at least increase – the taxable income you do have in the years before you’re going to receive these benefits.
If you have traditional IRAs or 401(k)s, you could start taking the funds out after age 59 ½ without being penalized for it, but you would increase your taxable income in those years. So if you are still working, and plan to be for a few more years after this age, then it may be a good way to use up your tax sheltered funds.
The idea behind this strategy is that you would be making more withdrawals from these accounts in your pre-social security days than you would be during the time you need these benefits.
You do not have to spend this money right away, but you should have a plan for withdrawing from a tax sheltered account so that you do not exceed what you can afford to pay in taxes during your working years.
As an added benefit to this strategy – you can take this money out and tuck it away so that you have those funds available to you when you need them. With this in mind, you can potentially delay receiving your social security benefits too which means you can increase the size of the benefits you do get when you get them
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Purchase An Annuity Contract
Also known as a qualified longevity annuity contract (QLAC), this strategy is a deferred annuity which is funded by a qualified retirement plan or an IRA.
This annuity will provide monthly payments for life and it is protected from any downturns the stock market may experience. Provided the annuity is compliant with IRS requirements and regulations, it will be exempt from RMD rules until payouts begin after the specified starting date of the annuity.
How this strategy works is that it limits your income but deferring it over years instead of taking your money all at once. This means that your taxable income will be lower and therefore you can keep more of your social security payment amounts.
The income from this type of plan can be deferred until the recipient if 85 years old, and then it will be taxed as income. If you’re considering an annuity contract, you will need to consider the benefits and drawbacks of having one. They may not be right for everyone so it’s really important that you talk to your financial planner for deciding on this option.
When it comes to taxing your social security, there are ways in which you can lower you taxable income so that you do not have to pay as much in taxes and keep more of your social security benefit.
Almost everyone will have to pay some in tax on social security, but if you can minimize it and keep more in your pocket then it will help you enjoy your retirement years just a little more!