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.
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Hypothetical Illustration-Not Indicative of any specific Product |
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| 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 |
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| Pension |
$25,000 |
$25,000 |
$25,000 |
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| Social Security Income |
$20,000 |
$20,000 |
$20,000 |
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| Total Income |
$55,000 |
$55,000 |
$45,000 |
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Social Security subject to tax |
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| Adjusted Gross Income |
$41,850 |
$31,850 |
$26,500 |
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Total Federal Tax |
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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
