Question

What would you recommend to a client on how they might reduce the amount of Social Security benefit that is subject to tax if they have surpassed the threshold?

Additional Information-

Assuming a couple married filing jointly received $40,000 in Social Security benefits, they would only need $12,000 in other income to reach the $32,000 threshold. If they had retirement plan income, pension, or investment income, this threshold can be easily reached.

Answer 1

Recomendation to client on social security benifits:

• You may be able to extend your retirement nest egg by seven years, on average, if you coordinate tax-efficient withdrawal strategies with your Social Security income.
• That’s because you’re probably paying federal taxes on the money you receive from Social Security. And the rate at which you are taxed can increase based on how you take money from other accounts.
• Here’s what you need to think about to keep more of your money in your pocket

Taxes are a certainty of life, including when it comes to your Social Security benefits.If you receive monthly benefit checks, it is very likely that income is taxed. In fact, a majority of people receiving Social Security benefits pay income tax on some of those earnings.But if you are not using strategies to manage your income, you could be increasing that tax bill. And that could mean less retirement income down the road.

William Meyer, founder of Social Security Solutions, a provider of benefits-claiming software, estimates that, on average, you can find up to seven years’ worth of more money by creating tax-efficient withdrawal strategies that coordinate Social Security benefits.

How Social Security benefits are taxed

Approximately 40% of people who receive Social Security benefits pay federal income taxes on that income, according to the Social Security Administration.If your income is low enough, none of your Social Security income may be taxed. But there are two additional tax tiers, which means that either 50% or 85% of your benefits could be subject to federal tax.In order to know where you fall, you need to know your “provisional,” or combined, income.

To calculate that, add your adjusted gross income plus non-taxable interest plus half of your Social Security benefits. Those values can be found on your 1040 tax form.If you file as an individual, you are subject to taxes on up to 50% of your Social Security benefits if your combined income is between $25,000 and $34,000. But if you’re over $34,000 in combined income, up to 85% of your benefits are subject to income taxes.Many people find out whether they owe federal income taxes on their Social Security income at tax time when they tally their Social Security benefit statement and other income.