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The Tax Cuts and Jobs Act of 2017 changed many rules, but one thing remains the same. That said, it’s very difficult to get around the tax office’s long arms.
That also applies to social security benefits. Many people know that working while receiving benefits before reaching full retirement age can permanently reduce benefits. But if you make too much money simply by making withdrawals from some types of retirement plans, you may end up having to pay income tax on your Social Security benefits.
according to Social Security Administration (SSA):
“Some of you have to pay federal income tax on your Social Security benefits. This usually only happens if you have other substantial income in addition to your benefits (wages, self-employment, etc.). operating income, interest, dividends, and other taxable income that must be reported on your tax return).”
Whether or not these benefits are taxable depends on your “combined income.” SSA defines this as the sum of:
- adjusted gross income
- your tax exempt interest
- half of social security benefits
If you file an individual tax return and your total income is between $25,000 and $34,000, you must pay income tax on up to 50% of your Social Security benefits. If you earn more than that, up to 85% of your benefits can be taxable.
If you file a joint return and your total income is between $32,000 and $44,000, you may be taxed on up to 50% of your benefits. If you earn more than that, you can be taxed up to 85%.
Fortunately, there are ways to reduce your income and reduce or avoid paying taxes on your Social Security benefits. They include:
1. Delay receiving rewards
choose to delay receiving social security benefits full retirement age — or better yet — may be the easiest way to avoid paying taxes on your Social Security benefits, at least for a while.
Waiting to apply for benefits also means you’ll get bigger checks every month when you finally start collecting them.
Learn more about the pros and cons of delaying social security benefits below.
2. Work less or not after retirement
For every dollar you earn working part-time, you can pay a little more in taxes on your Social Security benefits. Of course, quitting a job you enjoy or need just to pay less tax is silly.
But if the job is a low-paying pain in the neck with little financial return, you might be better off quitting, at least emotionally. security benefits.
3. Avoid municipal bonds
Many people are looking to municipal bonds as a way to pay less taxes. Interest earned on these types of bonds is generally not subject to income tax.
However, local bond interest teeth It is included in the formula that determines whether you pay taxes on social security benefits.
“When it comes to taxing Social Security benefits, tax-exempt municipal bond interest can become a ‘stealth tax’ that quietly eats away your income. Bondholders should be aware of these potential tax implications when deciding between tax-exempt municipal bonds and other types of bond investments. ”
Consider talking to your financial advisor to determine if holding municipal bonds could cause you such problems.
4. Withdraw money from loss account
If you’ve invested in a traditional IRA or 401(k) plan, expect a call from Uncle Sam when you retire. After deferring taxes on these donations for years, the bills are due when you start withdrawing money.
Additionally, these withdrawals can boost your total income and make a difference in whether or how much your profits are taxed.
One way to avoid such taxation is to withdraw only the amount that the government mandates each year (known as the Minimum Required Distribution (RMD)) and pay any additional cash needed through a Roth IRA or Roth 401 (k ) if so, plan. Roth’s distributions are tax-free. Also, these withdrawals do not affect your total income.
However, there are many good reasons not to withdraw money from your Roth account, including RMDs not applicable to Roth IRAs.
Therefore, consult a tax professional before making this decision. A pro will help you decide if withdrawing money from your loss account or a combination of withdrawals from both your loss and traditional accounts is the best strategy.
5. Donate RMD to Charity
Donating money to charity is a great way to make the world a better place. While doing good to others, it can also reduce your chances of being taxed on Social Security benefits.
If you’re 70½ or older, you can donate up to $100,000 of your minimum annual distribution to charity and avoid income tax on that money. this is, Eligible Charitable Distribution.
The money isn’t taxed, so it doesn’t add to your adjusted gross income. However, you should pay attention to some important rules.
Funds must go to a qualified 501(c)(3) organization to get started.
Also, you may not use funds from your 401(k) or other employer-sponsored plans to make this type of distribution. There are ways around this, such as rolling over money into an IRA, but don’t use this strategy without consulting your tax advisor.