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Minimizing Tax on Social Security Benefits

  • Writer: groupgarabedian
    groupgarabedian
  • Sep 28, 2021
  • 3 min read

Updated: Oct 5, 2021



Whether your Social Security benefits are taxable (and, if so, the amount that is taxed) depends on a number of issues. The following facts will help you understand the taxability of your Social Security benefits.


• For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive (i.e., the amount before reduction due to payments withheld for Medicare premiums). The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not included in the computation because they are not taxable under any circumstances.


• The amount of your Social Security benefits that are taxable (if any) depends on your total income and marital status.

  • If Social Security is your only source of income, it is generally not taxable.

  • On the other hand, if you have a significant amount of other income, as much as 85% of your Social Security benefits can be taxable.


• If you are married and lived with your spouse at any time during the year and file a separate return from your spouse using the married filing separately status, 85% of your Social Security benefits are taxable regardless of your income.


• The following quick computation can be done to determine if some of your benefits are taxable:


Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.


The base amounts are:

• $32,000 for married couples filing jointly;

• $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and

• $0 for married persons filing separately who lived together during the year.


Where taxpayers can defer their “other” income, such as Individual Retirement Account (IRA) distributions, from one year to another, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits for at least one of the years. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.


Individuals who have substantial IRAs—and who either aren’t currently making withdrawals or are making their post-age 72 required minimum distributions without currently withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one person may not work for another.


Gambling Tax Gotcha – Because gambling income is reported in full as income and the losses are an itemized deduction, the gross gambling winnings increase a taxpayer’s adjusted gross income (AGI) for the year. This can cause more of your Social Security benefits to be taxable, even if gambling losses exceed your winnings, simply because winnings are added to the AGI and losses are an itemized deduction.


Retirement is not one-size-fits-all; it’s different for everyone. Social Security is only one of the many resources available for you to plan for your retirement; however, it is not meant to be your only source of income. If you have a workplace retirement plan, be sure to find out how it works to make the most of it. Provided below are resources to help you plan for your ideal retirement lifestyle. If you have any questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give us a call.



Helpful Resources


Create a My Social Security Account


Understanding Your Social Security Statement


When to apply for Social Security Benefits


Ways to Save for Retirement


Build Your Retirement Income

 
 
 

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The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. Please consult legal or tax professionals for specific information regarding your individual situation. Some of this material was developed and produced by Crista Moreno. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. 

 

 

Copyright 2018 Blue Oak Wealth Management 

 

Aaron J. Garabedian is a registered representative with, and offers securities and advisory services through LPL Financial, a registered investment advisor, Member FINRA/SIPC.

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