Social Security Taxes - How to Reduce Taxes on your Social Security Benefits
You can reduce the social security taxes on your social security benefits
and this article explains how. The basic rule is that social security benefits
are taxable if your modified adjusted gross income (your adjusted gross income
plus tax exempt interest plus exclusions per IRS publication 915) exceeds the
following limits:
Percent
of social security income taxed |
Single,
head of household, qualifying widow(er), or married filing separately
and you lived apart from your spouse for all of the year, |
Married
people |
0% |
Less than $25,000 |
Less than $34,000 |
Up to 50% |
$25,001-$34,000 |
$34,001 to $44,000 |
Up to 85% |
More than $34,000 |
More than $44,000 |
Therefore, if you can engineer your includable income below these limits,
you may be able to reduce or eliminate taxes on social security income. This
may be possible using annuities. While this is not a recommendation to buy
annuities just because they can help reduce the tax on your social security
income, the table below illustrates how it is possible to reduce social security
taxes in some circumstances.
Using
Fixed Annuities to Reduce Tax on Social Security Benefits |
Hypothetical
Illustration-Not Indicative of any specific Product |
|
|
|
Scenario #1 |
Scenario #2 |
Scenario #3 |
|
|
|
Interest
from CDs |
Interest
from Tax Free Bonds |
Fixed Annuity
Interest (Not Distributed) |
Interest |
|
|
$10,000 |
$10,000 |
$10,000 |
Pension |
|
|
$25,000 |
$25,000 |
$25,000 |
Social Security Income |
$20,000 |
$20,000 |
$20,000 |
|
|
Total Income |
|
$55,000 |
$55,000 |
$45,000 |
|
|
|
|
|
|
|
Social Security
subject to tax |
$6,850 |
$6,850 |
$1,500 |
|
|
Adjusted Gross Income |
$41,850 |
$31,850 |
$26,500 |
|
|
|
|
|
|
|
|
Total Federal
Tax |
|
$2,691 |
$1,298 |
$763 |
|
You can see from the above table that if our hypothetical couple Mr. and
Mrs. Smith move money from CDs to municipal bonds to fixed annuities, the amount
of their social security income subject to tax changes, as does their total
federal tax. Their lowest tax situation is with the deferred annuity. If they
need to withdraw the interest from the annuity, this solution won’t help
them and they gain only if they allow the interest to reinvest.
Now let's look at income limitations when collecting social security benefits:
Social
Security Retirement Income — Earn
All You Want
|
