Everyone must make applicable Social Security income contributions, even those who work past full retirement age. Working after full retirement age can also increase Social Security benefits in the future because Social Security contributions continue to be paid.
- Depending on your income, you may have to pay income tax on part of your Social Security income.
- For 2020, couples filing jointly with combined income between $ 32,000 and $ 44,000 will be required to pay taxes on up to 50% of their benefits. If your combined income exceeds $ 44,000, up to 85% of your benefits will be taxed.
- For singles, those income thresholds are between $ 25,000 and $ 34,000 for 50% and more than $ 34,000 for 85%.
- Some states will also tax Social Security income separately from what the IRS requires.
Income and taxation of profits
Continuing to work, however, can reduce current payments, if any, taken during the year in which full retirement age is reached, according to a limit from the Social Security Administration, which changes each year.
If full retirement age is reached in July, for example, total benefit income earned from January to July must be below the limit, or Social Security benefits are reduced by $ 1 for every $ 3 of income above of the limit, which is $ 50,520 for 2021 and $ 51,960 for 2021.
That money is held by the Social Security Administration and gradually repaid once the taxpayer stops working. There are no limits on income earned after the month in which full retirement age is reached when the full benefit amount is paid, no matter how much income is generated.
However, taking Social Security benefits while continuing to work can have the unexpected negative consequence of driving the taxpayer into a higher tax bracket. Most people forget that a certain percentage of Social Security benefits may be taxable, up to 85%, depending on filing status and income combined, including half of Social Security benefits. .
Some states also tax Social Security benefits. Tax may be withheld from Social Security benefit payments by completing IRS Form W-4V or requesting a Voluntary Withholding Request Form online. Currently, there are 13 states where your Social Security benefits may also be taxed at the state level, at least for some beneficiaries. If you live in one of these states: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, or West Virginia, check with the appropriate state tax agency. As with federal tax, how these agencies tax Social Security varies based on income and other criteria.
How to lower your social security taxes
There are several resources available to those who pay taxes on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividends that are used in the interim income formula. In the two examples shown above, taxpayers would have reduced their Social Security tax if they had no reportable investment income in addition to their other income.
So the solution might be to convert reportable investment income into tax-deferred income, such as from an annuity, that won’t show up on your 1040 until you retire. If you have $ 200,000 in certificates of deposit (CDs) with a 3% profit, which translates to $ 6,000 a year, that will count as provisional income. But the same $ 200,000 that grows within an annuity, with the interest reinvested in the annuity, will effectively yield a reportable interest of $ 0 when calculating provisional income.
Annuities generally become taxable income when they are taken as distributions based on the type of account. Thus, virtually any investor who is not spending all of the interest paid on a CD or other taxable instrument can benefit from moving at least a portion of their assets to an investment or tax-deferred account.
Another possible remedy could be to simply work a little less, especially if you are at or near the threshold for your profits to be taxed. In the first example mentioned above, if Jim moved his taxable investments into an annuity and earned $ 1,000 less, he would have virtually no taxable profits. Switching investments from taxable accounts to a traditional or Roth IRA will also achieve the same goal, as long as the funding limits have not been exceeded.
Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors LLC, Amesbury, Mass.
As long as you work and earn income, whether self-employed or for an employer, you will be required to contribute to Social Security.
However, whether or not you need to pay taxes on your Social Security benefits depends on your modified adjusted gross income (MAGI). If your MAGI is above a certain threshold for your marital status (for example, single or married filing jointly), then your benefits will be taxable. Up to 85% of a taxpayer’s Social Security benefits are taxable.