Whether you’ve just surpassed the age restriction, recently retired, or are collecting due to disability, making sense of your Social Security benefits can be daunting.
The first step to making the most of your benefits is to determine whether or not they will be taxed. Tax liability on your benefits is determined based on your income and marital status.
Are Your Benefits Taxable?
According to TaxBuzz, benefits (which are calculated before deductions are taken for Medicare premiums,) are usually taxed if the recipient is married and filing taxes jointly, or if they have another significant source of income, such as other wages, interest, rent collection, and self-employment earnings.
• If Social Security benefits are your only source of income, it is unlikely that they will be taxed.
• For recipients who are married filing jointly, benefits are taxable if they and any other additional sources of income total greater than $32,000.
• For single taxpayers, the threshold is $25,000.
• However, due to the push in recent years to influence married couples to file jointly, if you are married and wish to file separately, but you have lived with your spouse for any portion of the year, your benefits are automatically considered taxable.
To determine whether you will be taxed on your benefits, add 50% of your Social Security benefits to any additional income you make. If the amount exceeds the limitations noted above for your category, as much as 85% of your benefits may be taxable.
Planning to Minimize Tax Liability
To minimize tax liability on your benefits, you may wish to:
• Defer non-Social Security income to stay below the taxable threshold
• File jointly with your spouse if you have lived together in the calendar year for which you are filing and do not exceed the income threshold for married filing jointly
• Consider taking IRA withdrawals before signing up for Social Security.
• Set up withholding on your Social Security benefits to avoid owing at the end of the year
To find out the best way to maximize your benefits, speak with your tax professional regarding your options.