Like the old paraphrased saying goes: In this world, two things are certain—death and taxes. The recent federal tax overhaul changed a lot of rules, so it’s as important as ever to understand your tax obligations, including those on Social Security benefits.
According to the Social Security Administration, some will be obligated to pay federal income taxes on Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).
No one can avoid the long arm of the tax man altogether, but there are ways to reduce your income and lower (or even avoid paying) taxes on your Social Security benefits. Consider the following tips:
- Consider withdrawing money from a Roth account:
If you need additional cash during the year, consider withdrawing it from your Roth IRA or Roth 401(k), Taxes are not due on Roth distributions and will not impact your adjusted gross income. Be aware of the minimum required distribution (RMD), however. Taxes are not due on Roth distributions as long as you have contribution basis.
- Distribute your RMD to charity: Giving money to charity is a great way to help make the world a better place. While doing good for others, you can also lower the odds that your Social Security benefit will be taxed. You can transfer up to 100k per year to qualified charities.
- Reevaluate working a part-time job: Money earned working a part-time job pushes you a little closer to owing taxes on Social Security benefits. If your part-time wages make little difference in your quality of life and/or you don’t like the work, consider ditching the part-time gig.
- Reconsider municipal bonds: People are often attracted to municipal bonds as a way to lower their tax bill because they are not subject to federal and state income taxes. However, municipal bond income is included in the formula that determines whether or not you will pay taxes on your Social Security benefits.
- Delay benefit collection: Delaying benefits until full retirement age (or beyond) is the best way to avoid paying taxes on Social Security benefits, at least for a while. Waiting to file for benefits also means a bigger check each month once you finally do start collecting.
Of course, be sure to consult with our firm if you have questions and to ensure the best tax strategy. Here’s to a happy and financially healthy New Year!