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Many people don’t owe federal income taxes on their Social Security retirement benefits. However, with $3,400 in monthly benefits, you could be one of the many people who do have to pay taxes on this income. From zero to 85% of your benefit income may be taxed as ordinary income, depending on your filing status and the amount and sources of your other income. You could also owe state taxes on your benefits. Moves to reduce or avoid taxes on your benefits include selecting your filing status wisely and using Roth withdrawals to reduce your taxable income. A financial advisor can help you come up with a plan to reduce your taxes in retirement, but here are some general guidelines to think about.
If you receive Social Security retirement benefits, you may owe income taxes on up to 85% of this income. About 40% of Social Security retirement benefit recipients find themselves in this situation, according to the Social Security Administration. This number generally rises each year because the cost-of-living adjustments to Social Security benefits puts more recipients into an income category that is required to pay tax on their benefits.
Whether or not you’ll owe taxes depends on your filing status, as well as a figure called your combined income. Combined income, also sometimes referred to as provisional income, consists of half your Social Security benefits, your adjusted gross income (AGI) and any non-taxable interest. Depending on how these factors add up, you may owe taxes on none, half or 85% of your benefit.
Here are the details about how all of this works:
Filing Status
Combined Income
Benefits Taxable
Single
Less than $25,000
None
Single
$25,000 to $34,000
50%
Single
Above $34,000
85%
Joint
Less than $32,000
None
Joint
$32,000 to $44,000
50%
Joint
Above $44,000
85%
If you are married and file jointly, it’s likely that you’ll owe taxes on your Social Security benefits, no matter what your combined income is.
If you receive $3,400 per month in Social Security benefits x 12 and have no other income, you wouldn’t owe any income tax on the $40,800 benefits unless you are married filing separately. Half of $40,800 is $20,400, and the threshold for benefit taxation is $25,000 if you file singly and $32,000 if you file jointly.
It doesn’t take much extra income to subject some of your benefits to taxation, however. Even with $10,000 in additional AGI, when added to $20,400 representing the Social Security benefit, the total comes to $30,400. At that combined income level, you would pay taxes on half your benefits if you file singly, although benefits for a joint filer would still be untaxed.
If you have as much as $23,501 in AGI, you’ll exceed the top income threshold for both single and joint filers. AGI of $23,501 plus half your Social Security benefit, or $20,400, is $44,001. At that level, 85% of Social Security benefits will be taxed regardless of filing status.
You may be able to reduce or avoid taxes on your Social Security benefits by using various strategies. Some of these are the same ones other taxpayers use to reduce AGI, including charitable contributions and tax-loss harvesting. Others include:
Use withdrawals from Roth retirement accounts for additional income. Roth withdrawals are tax-free and not included in AGI, so won’t increase your combined income.
Consider converting funds in IRA, 401(k) and other tax-deferred retirement accounts to Roth accounts so you can use them for tax-free withdrawals that won’t boost combined income. Be aware that conversions come with a current tax bill.
Use qualified charitable distributions to fulfill required minimum distributions (RMDs) from IRA, 401(k) and other tax-deferred retirement accounts without increasing your AGI.
If your taxable withdrawals from retirement accounts are going to increase your combined income over the maximum threshold, consider taking more withdrawals that year. The next year, you can reduce your withdrawals so that your combined income is lower than the minimum threshold and none of your benefits are taxed.
If you are married and file separately, consider changing your filing status to married filing jointly.
You can also consult with a financial advisor for help in creating a plan to mange your income and reduce your tax liability in retirement.
Federal income taxes aren’t the only ones to consider. Nine states tax Social Security benefits, as well. If you’re in one of these states, you may owe additional taxes on your benefits.
If you will owe income taxes on Social Security benefits, you can instruct the Social Security Administration to withhold a portion of your payments. To do this, contact the agency by phone, visit a local office or download IRS Form W-4 V, fill it out and mail it to your local office. A financial advisor can also help you navigate Social Security and other financial programs.
You may owe income taxes on all or part of your Social Security benefits depending on your filing status and the source and amount of any additional income you have. If $34,000 from Social Security is your only income, you likely won’t owe any tax unless you are married and file separately. Depending your income from other sources, you may owe taxes on up to 85% of your benefits no matter what your filing status. You may be able to reduce or avoid taxes on your Social Security benefits by using specific strategies for withdrawing from retirement accounts.
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