By Krista McBeath, McBeath Financial Group
If you’ve been reading our articles the past several months, you have become better acquainted with Social Security terms and have hopefully had some of your questions answered. Our final topic to the Social Security series is taxation. I quite often hear, “I have to pay taxes on my Social Security benefits?!” and then, “Is there any way I can pay less tax?” The answer to both of these questions is yes. It seems unfair that you spend a lifetime paying into Social Security only to have your benefit be taxed when you start receiving it in retirement. With proper planning, there may be a way to reduce or eliminate the tax you are paying on your Social Security benefit.
Depending on your total annual income, a portion of your Social Security benefits, or those of your spouse if filing jointly, may be subject to income tax. If the total of your taxable pensions, wages, interest, dividends, and other taxable income, plus any tax-exempt interest income, plus half of your Social Security benefits are more than a base amount, some of your benefits will be taxable. The amount of your Social Security benefits that you must include in taxable income depends on the total of your income plus half of your benefits; this is known as your provisional income. The higher the provisional income, then the more benefits that must be included in taxable income. You may have to pay income tax on anywhere from 50 percent to 85 percent of your total Social Security benefits.
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules.
If you file a federal tax return as an “individual:”
- And your provisional income is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- And your provisional income is more than $34,000, up to 85 percent of your benefits may be taxable.
If you file a joint return:
- And you and your spouse have provisional income that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
- And you and your spouse have provisional income that is more than $44,000, up to 85 percent of your benefits may be taxable.
There are a couple of different strategies that can be used to reduce your Social Security Tax:
- Reduce the amount of income you are receiving — change investments so as not to receive dividends or interest you are not using.
- The use of immediate annuities can help clients maintain their income but reduce the amount of Threshold Income they have to report. This is a great option for those who have assets that are not IRA’s, 401(k)’s etc.
Both of these strategies may reduce or eliminate the tax that you are paying on your Social Security. We can help you determine how much income you need and what portion of your Social Security is being taxed.
One last note as we wrap up the Social Security series. You may have heard a lot of media hype or hard-line sales tactics about Social Security not being there for you when you retire. According to the Social Security Administration, 90 percent of Americans, age 65 and older, receive Social Security retirement benefits. That makes Social Security the largest, most popular social program in the U.S. and it’s not going anywhere in one or two generations. Yes, our government will likely modify the program significantly over the next several years, but end it? What politician would vote for that!? If you are 55 years old or older, Social Security will certainly be there for you in your retirement.
Education of the Social Security program is an important part of your retirement road map. By truly understanding Social Security and all the options available, you can make better decisions for you and your family. Even if you have already started taking Social Security, there are some concepts that you may be able to implement to make your retirement more financially comfortable. You can, of course, keep things simple and take the plunge on your 62nd birthday (about half of workers do.) Even if that’s your plan, you owe it to yourself — and your spouse — to learn about Social Security and how to get the most out of the system. Don’t let Social Security just happen.
If you missed the previous articles on Social Security, you may read them online at HealthyCellsBN.com or contact Krista at 309-808-2224.
McBeath Financial Group can help you understand your options in order to help you make a better, more informed decision concerning your entitlement. They use a proprietary Social Security report that takes a look at five main issues that face people preparing to begin their Social Security payments. You may visit their Social Security Planning site at thefinancialhq.com/mfg or call 309-808-2224.
Photo credit: Goodluz/iStock