Social Security Tax

Ways To Plan Taxes Wisely On Social Security Benefits

For everyone paying federal taxes, there are always questions about the tax benefits available to them and the ways they can avoid taxes especially when it comes to social security benefits. If you have the same questions such as Are Social Security Benefits Taxable? What is Social Security Tax Benefits? How to avoid Social Security Tax? And much more, FinanceShed has answers. Check it out. 

How Does it Work?

Generally, the taxability of the social security benefits will depend upon your total income. The higher the income the higher are the taxes on social security benefits. If you file the federal returns as an individual and your combined income is below $25000, you won’t be taxed at all.

Here, your social security income refers to adjusted gross income and nontaxable interest plus one-half of your social security benefits. It the taxable income is between $25000 and $34000, the income about 50% may be subject to tax. If your income is anything above $34000, up to 85% of your income is subject to tax. 

If your child is in the receipt of social security benefits or dependent or survivor benefits, those incomes are not included in your taxable income. Also, Supplemental Security Incomes are not taxable. 

Also Read: All You Need To Know About Healthy And Tax Sheltered Retirement Plan: 403(b)

How to Avoid Tax?
Receive the Income Before Retirement

Social Security Tax

Source: insideyourira.com

Try to receive or withdraw the income before you get retired and try to increase your taxable income by withdrawing the benefits before you get retired. Any kind of withdrawal is taxable so it must be planned well in advance as to when to withdraw the amount of benefit by considering the tax compliances from withdrawals, Social Security benefits, and any other sources. 

IRA Charity

Social Security Tax

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People who are 70½ or older can give up to $100,000 annually as charity from a traditional IRA. This can help as it counts for fulfilling any requirements once you surpass the age of 70½. Be careful as the withdrawal does not count for charity so try to have it done as a direct transfer from your IRA to the charity. This keeps you below the cutoffs that determine what portion of your Social Security benefits is taxable. 

Roth Accounts

Social Security Tax

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All the contributions made to Roth IRA or 401k accounts are considered as after-tax, thus these contributions are not subject to tax. These withdrawals can provide supplemental income without affecting the combined income calculation. To avoid taxes on your retirement, try to transfer funds from your traditional IRA to Roth IRA accounts as it also doesn’t require minimum distributions. 

Try to Avoid Capital Gains

Social Security Tax

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The investments done in mutual funds can generate capital gains even when the individual stocks are losing. Also, try to stick with the growth investments. Growth stocks reinvest the gains out of the investments and do not pay out lots of their profits in the form of dividends or share buybacks. 

Go for Annuity Contract

Social Security Tax

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Go for Qualified Longevity Annuity Contracts (QLAC) as these provide guaranteed monthly payments until death and are shielded from the downturns of the stock market. These incomes can also be deferred until the age of 85. You can go for an investment of up to $130000 form your IRA or 401k account in QLAC. 

Social Security Tax

Source: kiplinger.com

These were some of the ways you can get tax savings from social security benefits. But try to plan for these investments in the beginning as some of these may not be available once you retire. Here is some Best Way To Invest 5000$.