If you’re looking to minimize tax on Social Security benefits, this article can help. Whether or not your Social Security benefits are taxable depends on a number of issues. Let us help you understand the taxability of your Social Security benefits and at what amount.
For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive. That is, the amount before reduction due to payments withheld for Medicare premiums. The tax treatment of Social Security benefits is the same regardless of why benefits are paid. Again, the tax is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. We did not include information on Supplemental Security Income (SSI) benefits 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.
- However, if you have a significant amount of other income, up to 85% of your SS benefits can be taxable.
- NOTE: If you are married and lived with your spouse at any time during the year. AND if you file a separate return from your spouse using the married filing separately status. Then 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return. AND thus reducing the amount of Social Security income subject to tax.
Do this quick computation to determine if some of your benefits are taxable:
First, add one-half of the total Social Security benefits you received to the total of your other income. Be sure to include any tax-exempt interest and other exclusions from income.
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 and qualifying widows/widowers with dependent children. Also for married individuals filing separately who did not live with their spouses at any time during the year;
- $0 for married persons filing separately who lived together during the year.
Deferring Income to Minimize Tax on Social Security benefits
- One strategy is when taxpayers can defer their “other” income from one year to another. They do this to minimize tax on Social Security. An example of this could be planning Individual Retirement Account (IRA) distributions. Deferring income often allows an individual to eliminate or minimize tax on SS benefits. At least for one of the years. However, one must take into account the required minimum distribution rules for IRAs and other retirement plans .
Individuals who have substantial IRAs (and aren’t using them) may be missing an opportunity for some tax-free withdrawals. For example, someone who isn’t required to make withdrawals. Or someone making their post-age 72 required minimum distributions, but not withdrawing enough to reach the Social Security taxable threshold. Everyone’s circumstances are different, however, and what works for one person may not work for another.
Gambling Tax Gotcha to Minimize Tax on Social Security benefits
So gambling income is reported as income, while losses are an itemized deduction. Thus the gross gambling winnings increase a taxpayer’s adjusted gross income (AGI) for the year. This can cause more of your SS benefits to be taxable. Even if your gambling losses exceed your winnings! This is simply because winnings are added to the AGI, while losses are an itemized deduction.
Questions about how these issues affect your specific situation? Great! Give us a call. Or if you’d like to do some tax planning, please call to schedule an appointment and we can chat.
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