How is Social Security Taxed?
If your total income is $25,000 for an individual, or $32,000 for a married couple filing jointly, you must pay federal income taxes on your Social Security benefits. If you make less than this, you are considered ‘below the threshold’ and you do not have to pay taxes on your benefits.
The portion of your benefits that is subject to taxation varies based on your income level:
- You will be taxed up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual or $32,000 to $44,000 for a married couple filing jointly.
- You will be taxed up to 85 percent of your benefits if your income is more than $34,000 individually or $44,000 for a couple.
AARP gives this example. If you make $50,000 in income and get $1,500 in Social Security benefits, you would pay 85 percent of your $18,000 in annual benefits. Nobody pays more than 85 percent of their Social Security benefits, regardless of their income.
How to Lower Your Social Security Taxes
The Social Security Administration estimates that over half of Social Security beneficiaries owe income taxes on their benefits. Here’s how to reduce or avoid taxes on your benefit:
- Stay below the taxable thresholds. Working during retirement can certainly help out your finances, but make sure that it’s worth it. Reducing your income sources can save on taxes, so it could be a wash with a part-time job.
- Manage other retirement sources. You probably have more sources of income than you realize - a part-time job, pension payments, dividends and interest from savings and investments, withdrawals from IRAs and more. Manage these carefully.
- Leverage your IRA withdrawals. You can begin taking penalty-free distributions after 59 ½. You might be able to reduce your Social Security income tax bill if you withdraw money from your 401(k) or IRA before signing up for Social Security.
- Pay attention to state taxes. Most states don’t tax Social Security income, including New Jersey. However, 13 states do. Speak with your financial advisor regarding how your state taxes Social Security.
Ways to Pay Social Security Taxes
If you do end up paying taxes on Social Security, you have options as to how. You can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your monthly payments. You can choose the following percentages: 7, 10, 12 or 22 percent. You cannot choose a flat rate or a different percentage. Most people prefer the convenience of tax withholding.
To speak with an experienced financial advisor in New Jersey regarding Social Security taxes, contact Leonard Financial Solutions today.