SRG Social Security Planning Services
Many people don’t know that their Social Security benefits are taxable. Many of those who do know, don’t know how to adequately plan in order to lower the tax on their benefits, and even pocket extra benefits. That’s what we’re here for.
An individual filing a federal return will be taxed on up to 50% of his benefits if his combined income is between $25k and $34k. Combined income consists of adjusted gross income, tax-exempt interest, and ½ of his SS benefits. If his combined income is above $34k, he will be taxed on up to 85% of his benefits. A married couple filing jointly will be taxed on up to 50% of their benefits if their income is between $32k and $44k, and up to 85% if their income is above $44k.
To illustrate, a couple makes $42k of combined income, which includes half of their $12k in SS benefits. The $42k exceeds the base amount by $10k. The amount of benefits included in taxable income is the lesser of half of their benefits ($6k), or half of excess income over the base amount ($5k). Therefore, they will include $5k of their SS benefits in their taxable income. If they are in the 15% tax bracket, the tax on their benefits will be $750.
In order to have the lowest amount of taxable benefits, one should attempt to reduce overall taxable income to stay below thresholds, and manage other retirement income sources. For example, if one has a traditional IRA set up, he should take withdrawals before signing up to get SS benefits, because traditional IRA distributions are included in taxable income. If, however, he has been saving in a Roth IRA, distributions would not contribute to taxable income, and thus would not affect the taxation of the SS benefits. It is possible to convert a traditional IRA to a Roth, but keep in mind that contributions to a Roth are not tax deductible. It may make sense to do it in small conversions over a bunch of years, or do it at once and save the distributions from being included in taxable income.
In addition to the above, there are many other factors to consider when deciding when to apply for benefits. The exact age that one becomes eligible to claim benefits depends on his birth year, and can be found online. If he decides to delay claiming the benefits, the amount will increase by 8% each year from eligibility until age 70. Therefore, planning is crucial in order to maximize the amount of benefits to be paid out. If, for example, one is in good health and has other sources of retirement income, it would make sense for him to delay receiving benefits. Another factor that comes into play is health insurance. One cannot apply for Medicare until age 65, but if he retires from work and is off his employer’s insurance plan, he will have to pay a hefty amount for his health insurance unless he is able to go on his spouse’s plan. An important thing to keep in mind is that, aside from the potential extra 8%, the amount of benefits one may claim is a set amount based on his 35 highest earning years. Therefore, he has a choice whether he wants to be paid in larger amount for fewer years, or smaller amounts for more years.
There are many important considerations and decisions to make regarding Social Security benefits, but with the proper planning, one can maximize his distributions while reducing his taxable amount. At SRG, we have licensed tax professionals who are well versed in this area and can help you plan and make the best decisions for your future. We can provide you with an estimate of your future benefits, and come up with the best possible strategy for you.