To paraphrase an old adage, death and taxes are the only two certainties in life! Governments earn precious revenue by taxing their citizens, and it seems that there are no limits on the number of ways the former can employ when it comes to collecting taxes. However, there are legitimate ways in which you can avoid paying certain taxes and this article focuses on how you can avoid paying taxes on your Social Security (SS) benefits.
When SS is subject to tax
Tax on social security benefits becomes applicable when your combined income exceeds the threshold limit fixed by the IRS, based on the status of filing as well as income reported. Combined income will include the following:
- Current taxable income - income from salaries, profits from a business, rental income, etc;
- Income earned from interest on various investments - CDs, mutual funds, bonds, etc;
- 50% of SS benefits received.
The total income from these 3 heads is added and if that total exceeds the threshold limit specified, then your Social Security benefits up to a maximum amount of 85% can be subjected to tax (the minimum is 50% of SS benefits).
These are fixed by the IRS on an annual basis, taking into account salary hikes, inflation etc. Currently, the limits are fixed as follows:
Single individual/head of household/widow/widower/‘married, but filing separately'
- Combined income below $25,000, no taxes are payable on SS benefits;
- Combined income between $25,000 and $34,000 - up to 50% of benefits received are taxable;
- Combined income greater than $34,000 - up to 85% may be taxable.
Married and filing jointly
- Combined income in this instance is the sum of taxable income, all interest income and 50% of SS benefits for both spouses.
- Combined income below $32,000, no tax is payable;
- Between $32,000 and $44,000, 50% of benefits received is taxable;
- $44,000 and above, up to 85% may be taxable.
Avoiding Taxes on Social Security benefits
Listed below are some guidelines on how you can avoid paying taxes on SS benefits:
- Convert income received by way of interest, dividends or capital gains into tax-deferred instruments such as annuities, lowering your combined income to an amount which falls under the threshold limits detailed above, i.e. $25,000 and $32,000 respectively.
- Trade tax-attracting investments and buy IRAs - regular or Roth - reducing the combined income reported for taxes.
- Consult a tax professional who can provide the best advice on how you can reduce your tax burden.
Follow the tips provided in this article to understand how you can be taxed on your Social Security benefits and how you can avoid or reduce the amount of taxes paid on them.