For many retirees, Social Security is a vital part of their retirement income strategy. However, it’s important to know that some of these benefits may be subject to taxes, especially if you also receive additional income from other sources.
If you receive $2,700 per month in Social Security benefits, your check is above the average of approximately $1,907. This might mean you will need to pay taxes on this income.
| Important links |
|---|
| Food Stamps |
| PAYMENTS |
| stimulus checks |
| SSDI |
How do taxes on Social Security retirement benefits work?
It’s never too late to develop a strategy to help reduce your tax liability, but the first step is understanding how taxes work on the money you receive from Social Security. Here, we explain whether you will have to pay taxes on the $2,700 you receive in Social Security retirement benefits.
Taxes on Social Security benefits are calculated based on your combined income, which includes your adjusted gross income (AGI), non-taxable interest earnings, and half of your Social Security benefits (and your spouse’s if you file a joint return).
AGI includes wages, interest, investments, distributions from traditional 401(k) plans, and traditional IRAs, minus certain income adjustments.
Calculating the taxes
For example, if you withdraw $52,000 from your 401(k) and receive $42,000 in annual Social Security benefits, your combined income would be $73,000 ($52,000 + $21,000). From this figure, the IRS uses the following income levels to tax the benefits of individuals filing as single:
- Combined income below $25,000: Benefits are not subject to taxes.
- Combined income between $25,000 and $34,000: Up to 50% of benefits are subject to taxes.
- Combined income over $34,000: Up to 85% of benefits are subject to taxes.
Joint filings
If you file a joint return with your spouse, the following levels will determine the income to tax the benefits:
- Combined income below $32,000: Benefits are not subject to taxes.
- Combined income between $32,000 and $44,000: Up to 50% of benefits are subject to taxes.
- Combined income over $44,000: Up to 85% of benefits are subject to taxes.
It’s important to note that these are not tax rates; rather, they mean that up to 50% or up to 85% of your Social Security benefits will be subject to your ordinary income tax rates.
How can you reduce taxes on your Social Security benefits?
The higher your combined income, the more of your benefits may be subject to taxes. If you receive $2,700 per month in Social Security retirement benefits, this totals $32,400 per year, resulting in an initial combined income of $16,200.
If Social Security were your only source of income, you wouldn’t have to pay any taxes on your benefits.
However, from this figure, taxes will apply depending on your other income sources. Suppose you withdraw $45,000 from your 401(k); this would make your total combined income $61,200, meaning up to 85% of your annual benefits would be subject to taxes. What can you do to avoid this? Here are some strategies to reduce the potential tax payment on your Social Security benefits.
Strategies to reduce taxes
Withdraw less money from your retirement accounts: Depending on your retirement budget and lifestyle, the less you withdraw, the more you can stay below the IRS’s tax thresholds. Structure Roth withdrawals: Money withdrawn from a Roth IRA or Roth 401(k) does not count towards your taxable income for the year, so these withdrawals will not affect your combined income.
Delay Social Security benefits: You can defer your Social Security benefits and live off portfolio withdrawals until you reach age 70, when the benefits max out. You wouldn’t pay taxes on deferred benefits.
Carefully planning your income and withdrawals can help minimize taxes on your Social Security benefits.
It’s crucial to understand how these taxes are calculated and consider strategies that allow you to reduce your tax burden. Consulting with a financial or tax advisor can provide personalized guidance tailored to your specific circumstances, ensuring a more comfortable and tax-free retirement.