Social Security benefits can generate real income during retirement, with the amount you receive depending on your work history. Those who earned more during their working years can receive higher benefits, with someone with maximum credits potentially receiving almost $60,000 per year by waiting until age 70. However, higher benefits also mean higher taxes, as the IRS can levy income taxes on Social Security benefits. Managing these taxes is important, and consulting a financial advisor can provide guidance on how to do so effectively.
Social Security benefits are taxed based on a system called “combined income,” which calculates your adjusted gross income (AGI) plus half of your Social Security benefits. The taxation of benefits depends on filing status, with different tiers for individuals and joint filers. For individuals, combined income below $25,000 incurs no benefit taxes, while combined income above $34,000 can result in income taxes on up to 85% of benefits. Joint filers have similar tiers, with the thresholds adjusted for their filing status.
Reducing Social Security taxes typically involves reducing taxable income to lower your combined income and fall into a lower tax tier. One strategy is to make a Roth IRA conversion, converting retirement assets into a Roth IRA to eliminate taxable income. Adjusting withdrawals is another option, allowing you to control when and how much income you take to minimize taxes on benefits. By carefully planning your withdrawals, you can potentially save money on taxes and maximize your retirement income.
While there are other ways to reduce adjusted gross income and lower your tax bill, such as through deductions or tax credits, reducing taxes on Social Security benefits is crucial for those receiving substantial retirement income from a taxable portfolio. Consulting a financial advisor can help you navigate the complexities of managing taxes on benefits and develop a strategy to minimize your tax liability. By taking proactive steps to reduce taxes on Social Security benefits, you can maximize your retirement income and financial security.
