Determining how your income impacts Social Security (SS) taxes is important for tax planning. Factors that determine how much SS tax you pay, depending on your circumstances, include:
- If you have income from working in retirement.
- If you are self-employed.
- If you receive interest, dividends, or other taxable income.
You may pay SS tax if you:
- File an individual federal tax return, and if your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits.
- File a joint federal tax return, and you and your spouse have a combined income between $32,000 and $44,000; you may have to pay income tax on up to 50% of your benefits. If you have more than $44,000 in income, up to 85% of your benefits may be taxable.
- Are married and file a separate tax return, you may have to pay SS taxes.
There are strategies to help you reduce SS taxes by minimizing your adjusted gross income (AGI). Depending on your situation, you may have these options available to you:
- Minimize withdrawals from tax-advantaged vehicles. Withdrawals from your IRA or 401(k) will be considered income and subject to taxes. Decreasing the frequency or only taking the minimum amount, for example, the required minimum distribution (RMD), can help reduce your AGI.
- Keep your income below the SS tax threshold. If your AGI is under $25,000 as an individual or under $32,000 combined income when filing jointly, you may be SS tax-exempt. Due to the complexities of taxation, visit your tax professional about your situation.
- Use a Roth IRA conversion strategy. Roth IRAs have tax-free distributions and no RMDs. Use this strategy to convert IRAs, 401(k)s, and other tax-deferred vehicles to tax-free income in retirement. You will need to pay taxes at the rollover transfer, so you should consult your tax professional before converting your IRA, 401(k), or other tax-advantaged accounts to understand your situation.
Earnings on the Roth IRA that accumulate after the rollover will be eligible for tax-free withdrawal when the Roth IRA has been open for at least five years and you are at least 59½.
- Donate to charity. Your RMDs can be donated, eliminating the income from your AGI for the donation. Another strategy called a qualified charitable distribution (QCD) allows you to distribute funds from your IRA to an eligible charity (a 501(c)(3) organization) if you’re age 70 1/2 or older.
- Reduce your business income. Reducing your pass-through income by increasing business deductions and expenses can help lower SS taxes. You can maximize your retirement savings using specific strategies and lower your taxable income simultaneously. Work with your financial and tax professionals for business planning to determine which tax-saving strategies are appropriate for your situation as a business owner.
- Maximize your capital losses. If you’ve invested and lost value, you may want to sell the investment and realize the loss so you can claim it on your taxes through a tax-loss-harvesting strategy. The tax write-off may provide a deduction on your taxes. Your financial and tax professionals can help you understand how capital losses work and if you qualify.
While there is no way to eliminate paying taxes, your financial and tax professionals can help determine strategies that may save you money depending on your circumstances.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax.
The Roth IRA offers tax deferral on any earnings in the account. Withdrawals from the account may be tax free, as long as they are considered qualified. Limitations and restrictions may apply. Withdrawals prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Future tax laws can change at any time and may impact the benefits of Roth IRAs. Their tax treatment may change.
Traditional IRA account owners should consider the tax ramifications, age and income restrictions in regards to executing a conversion from a Traditional IRA to a Roth IRA. The converted amount is generally subject to income taxation.
All information is believed to be from reliable sources; however LPL Financial makes no representation as to its completeness or accuracy.
This article was prepared by Fresh Finance.
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