Donate Your Required Minimum Distribution
If you cant wiggle out of taking your RMD from a traditional IRA, then donate it to charity to get into the tax-free zone. The donation could allow you to deduct the amount from your adjusted gross income. But youll have to be eligible for the qualified charitable distribution rule, including being over age 72 and paying the distribution directly from the IRA to the charity.
Thats a strategy that Crane suggests, though he acknowledges that some people will have too much income and simply wont be able to lower their adjusted gross income.
Calculator: How Much Of My Social Security Benefits Is Taxable
September 15, 2022Keywords: calculator, retirement, Social Security, tax planning
Social Security benefits are 100% tax-free when your income is low. As your total income goes up, youll pay federal income tax on a portion of the benefits while the rest of your Social Security benefits remain tax-free. This taxable portion goes up as your income rises, but it will never exceed 85%. Even if your annual income is $1 million, at least 15% of your Social Security benefits will stay tax-free.
Why Social Security Is In Trouble
Part of the problem can be attributed to longer life expectancies, a smaller working-age population and an increase in the number of retirees. By 2035, the number of Americans 65 and older will increase to more than 78 million from about 56 million today. As a result, more people will be taking money out of the Social Security system — but there will be fewer people paying into it.
That doesn’t mean the program will run out of money entirely, though. Payroll taxes are expected to cover about 78% of scheduled benefits. But, if the funding gap isn’t filled, retirees could get lower Social Security payments or workers might need to pay more into the system. If no changes are made, this is what Social Security could look like in the future, according to experts.
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How Social Security Disability Works
President Franklin Roosevelt included the Social Security program as part of his New Deal government reforms of the 1930s. The purpose of the New Deal was to lift the country out of the Great Depression and restore its economy. Social Security was designed to provide a financial safety net for older Americans and those with qualifying disabilities.
Most people who receive Social Security disability benefits fall into the former category. They have reached at least the minimum retirement age of 62 and have filed to receive monthly benefits based on the money they paid into the system during their working years.
People who receive Social Security benefits due to a disability do not have to be of a particular age to receive benefits . Instead, their disability must meet the strict criteria laid out by the Social Security Administration .
First, the SSA says, “Your condition must significantly limit your ability to do basic work such as lifting, standing, walking, sitting, and rememberingfor at least 12 months.” The condition must prevent you from doing the kind of work you did previously, and based on your age, education, experience, and transferable skills, you are unable to perform other work.
Additionally, you must not currently be working or working so little that your monthly income is under $1,310 in 2021 . The specific type of disability must be included on the SSA’s approved list or otherwise judged to be of equal severity to a condition on the list.
Sorry Folks But The Taxation Of Benefits Is Here To Stay
To be crystal clear, there aren’t many people that like this tax, as it’s often viewed as a means of being double taxed . Nevertheless, even with overwhelming public support to shelve the taxation of benefits, it’s not going to happen.
The reason? Social Security is, once again, facing an imminent cash shortfall. Despite what looks to be a healthy trust fund ratio of 289% as of 2018, the Social Security Board of Trustees has forecast that the program’s nearly $2.9 trillion in asset reserves will be completely gone by 2035. If Congress were to fail to act, this would lead to an across-the-board benefit cut for retirees of up to 23%. To just lay this out in a no-nonsense way, Social Security needs all the revenue it can get right now.
If lawmakers were to end the taxation of benefits, it could definitely lead to a modest boost in income for middle-class and upper-income retired individuals and couples. However, it would be removing quite a bit of money from Social Security each year. Last year, the taxation of benefits accounted for $35 billion of the $1 trillion collected, and over the next decade an estimated $596 billion will be collected by the Social Security program solely from taxing benefits. Removing this income from the equation would only speed up the process by which Social Security’s asset reserves would be exhausted, thereby leading to even quicker across-the-board benefit cuts.
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Dont Forget Social Security Benefits May Be Taxable
Tax Tip 2020-76, June 25, 2020
Taxpayers receiving Social Security benefits may have to pay federal income tax on a portion of those benefits.
Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.
The portion of benefits that are taxable depends on the taxpayer’s income and filing status.
Social Security Benefit Taxation By State
Out of all 50 states in the U.S., 38 states and the District of Columbia do not levy a tax on Social Security benefits. Of this number, nine statesAlaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyomingdo not collect state income tax, including on Social Security income.
Out of the nine states that do not levy an income tax, New Hampshire still taxes dividend and interest income.
Below is a list of the 12 states that do levy a tax on Social Security benefits on top of the federal tax, with details on each states tax policy.
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Taxable Social Security Benefits Calculator
Since retirement income is all about the dollars you get to keep in your pocket, its helpful to know how much of your Social Security benefits youll have to give up in taxes.
Thats what this taxable Social Security benefits calculator is designed to do: Give you an estimate of how much youll have to pay in taxes on your monthly benefits.
Before you use this calculator, it may be helpful for you to read a few of my articles on the taxation of Social Security in conjunction with using this calculator.
Will You Owe Taxes On Your Social Security Benefits
As with most questions about taxes, the answer is “it depends.”
About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration . That’s because their income in retirement exceeds limits set by tax rules and regulations.
Generally, if Social Security is your only retirement income, you won’t have to pay taxes on it. But if you have at least moderate income, you’ll most likely owe the government some money.
The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it’s never 100%. That’s considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.
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Minimize Withdrawals From Your Retirement Plans
Money that you pull from your traditional IRA or traditional 401 will count as income in the year that you withdraw it. So if you can minimize those withdrawals or even not withdraw that money at all, it will help you get close to the tax-free threshold. Of course, this may not be possible if youre forced to take a required minimum distribution that pushes you over the edge.
If youre not forced to take an RMD in a given year, consider taking money from your Roth IRA or Roth 401 instead and avoid generating taxable income.
Is It Likely That Benefits Will Be Cut
Some experts doubt that a big slash in Social Security benefits is forthcoming.
“The ramifications of that event would be beyond traumatic for everyone in the country,” said Joseph E. Roseman Jr., a Social Security expert and retirement planner at Retirement Capital Planners. “You’ve got a national disaster on your hands.”
That’s why he thinks Congress will step in before 2035 to prevent such a deep cut in benefits. Mary Beth Franklin, a Social Security expert and contributing editor for Investment News, agrees that a big cut in benefits is unlikely.
“As pensions are disappearing, people are relying more on Social Security,” she said. Because of the program’s popularity, politicians won’t want to tinker with benefits for existing retirees and will likely have to find other solutions to the trust fund shortfall.
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How To Minimize Taxes On Your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.
Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:
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Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax
Getty Images
Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.
There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.
On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.
payments sent by the Social Security Administration are not taxable.)
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Simplifying Your Social Security Taxes
During your working years, your employer probably withheld payroll taxes from your paycheck. If you make enough in retirement that you need to pay federal income tax, then you will also need to withhold taxes from your monthly income.
To withhold taxes from your Social Security benefits, you will need to fill out Form W-4V . The form only has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After you fill out the form, mail it to your closest Social Security Administration office or drop it off in person.
If you prefer to pay more exact withholding payments, you can choose to file estimated tax payments instead of having the SSA withhold taxes. Estimated payments are tax payments that you make each quarter on income that an employer is not required to withhold tax from. So if you ever earned income from self-employment, you may already be familiar with estimated payments.
In general, its easier for retirees to have the SSA withhold taxes. Estimated taxes are a bit more complicated and will simply require you to do more work throughout the year. However, you should make the decision based on your personal situation. At any time you can also switch strategies by asking the the SSA to stop withholding taxes.
When Disability Benefits Are Taxed
Whether Social Security disability benefits are taxed depends on your total income. You will avoid taxes if your total incomewhich is determined by adding one-half of your disability benefits to all other sources of income, including tax-exempt interestis below the threshold set by the Internal Revenue Service . If you are single, the threshold amount is currently $25,000. If you are married and file jointly, it is $32,000.
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Tax Withholding And Estimated Tax Payments For Social Security Benefits
If you know in advance that a portion of your Social Security benefits will be taxed, it’s a good idea to have federal income taxes withheld from your payment each month. Simply fill out Form W-4V to request withholding at a rate of 7%, 10%, 12% or 22%, and then send the form to your local Social Security office.
If you don’t want to have taxes withheld from your monthly payments, you can make quarterly estimated tax payments instead. Either way, you just want to make sure you have enough withheld or paid quarterly to avoid an IRS underpayment penalty when you file your income tax return for the year.
State Taxes On Social Security Benefits
Everything weve discussed above is about your federal income taxes. Depending on where you live, you may also have to pay state income taxes.
There are 12 states that collect taxes on at least some Social Security income. Two of those states follow the same taxation rules as the federal government. So if you live in one of those two states then you will pay the states regular income tax rates on all of your taxable benefits .
The other states also follow the federal rules but offer deductions or exemptions based on your age or income. So in those nine states, you likely wont pay tax on the full taxable amount.
The other 38 states do not tax Social Security income.
| State Taxes on Social Security Benefits | |
| Taxed According to Federal Rules | Minnesota, Utah |
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Is A 401 Withdrawal Considered Income For Social Security
You dont have to pay Social Security taxes on a 401 withdrawal. A 401 withdrawal also generally wont affect your benefits.
A 401 withdrawal can increase your Adjusted Gross Income and potentially make your Social Security benefits taxable. Many people work with a financial planner to time their 401 withdrawals and when they start taking Social Security in order to minimize taxes.
How To Calculate Your Social Security Income Taxes
If your Social Security income is taxable, the amount you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income.
Again, if you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2022. For the 2022 tax year , single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either:
- half of your annual Social Security benefits OR
- half of the difference between your combined income and the IRS base amount
The example above is for someone whos paying taxes on 50% of their Social Security benefits. Things get more complex if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.
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Taxes On Benefits Support Social Security And Medicare
The proceeds from taxing Social Security benefits provide an increasingly important source of income for both Social Security and Medicare.
- The revenue from taxing up to 50 percent of Social Security benefits is devoted to the two Social Security trust funds. In 2019, this will provide an estimated $36.9 billion in income to the Old-Age and Survivors and Disability Insurance trust funds, or about 3.5 percent of their total income. Since the income thresholds are not indexed for inflation, taxes on benefits will grow to 7.4 percent of Social Security income by 2028.
- The revenue from taxing 50 to 85 percent of Social Security benefits is devoted to Medicares Hospital Insurance trust fund. This will represent $24.1 billion, or 7.4 percent, of HI income in 2019 and 12.4 percent of income by 2028.
The taxation of benefits will provide almost $1 trillion to the Social Security and Medicare trust funds over the next ten years. Without this income, the programs would face greater funding shortfalls and earlier reserve depletion dates.