One advantage of tax planning is that it provides more income throughout a lifetime, even and especially during your retirement years. Tax planning and management entails outlining the best tax strategies now and for years into the future. Therefore, when it comes to this in-depth tax planning, Social Security benefits and taxes should always be high on the list of considerations.
Furthermore, to craft an effective tax strategy for Social Security income, you must consider many factors that align with a lifetime of future ambitions. Saddock Advisory is an expert in taxes during all of life’s milestones and can certainly do the heavy lifting when it comes to your best moves forward. However, the process starts with understanding the different options and strategies.
Understanding the Social Security Tax Rate
Whether or not your Social Security benefits are taxed depends on a range of factors, including your income during your retirement years.
According to the IRS, your Social Security benefits may be taxable if the total of (1) one-half of your benefits, plus (2) all of your other income, including tax-exempt interest, is greater than the base amount for your filing status.
For tax year 2024, these base amounts are as follows:
- $25,000 if you’re single, head of household, or qualifying surviving spouse
- $25,000 if you’re married filing separately and lived apart from your spouse for the entire year
- $32,000 if you’re married and filing jointly
- $0 if you’re married, filing separately, and living with your spouse at any time during the tax year.
Remember that there are tools available to help you make these determinations and calculations. For example, the IRS has an online tool that can help determine if your Social Security income has been taxable for at least the past three years.
How Much Tax Will be Withheld from Your Social Security Checks?
If your Social Security benefits are taxable, you can choose whether taxes are withheld from your Social Security checks.
To be on the safe side, you may want to go ahead and have a percentage withheld from your checks that is equal to roughly half of the taxes that may be due on your Social Security income for the entire year. In addition, up to 50% of your Social Security may be subject to taxes, depending on your overall income.
Ways to Reduce Taxes on Your Social Security Benefits
When it comes to tax strategies for Social Security, there are a few initiatives you can take to minimize your tax liabilities. These opportunities include (but are certainly not limited to) the following:
- Prioritize withdrawals from your tax-free retirement accounts, like a Roth 401(k) or Roth IRA, rather than a traditional retirement account.
- If you must take withdraws from a taxable retirement account, donate your required minimum distributions (RMDs) to charity so that they will not count as taxable income
- Take a large portion of your IRA or 401(k) withdrawals before claiming Social Security benefits.
- If you have not retired yet, examine your options when it comes to tax-free retirement accounts. You may even be able to shift from one type of retirement account you already have established to another tax-free type.
- Defer any extra freelance or gig income whenever possible. For example, if you earn extra freelance income, you can defer it to another year by sending out invoices after December 31.
- Examine your investment portfolio, and pivot to tax-free investments and assets that can still generate income.
- Conduct tax planning throughout the year, and closely monitor your income and expenses. It’s smart to always have a gauge of your potential credits and deductions so you’ll have a clearer picture of whether you will owe tax on your Social Security benefits.
The Best Social Security Tax Planning Strategy is to Partner with an Expert
At Saddock Advisory, we can help make tax planning and management a beneficial and simplified process by serving as your constant behind-the-scenes resource.
We’ll help you map out the strategies that work best for you now and throughout your retirement. Therefore, you can enjoy your retirement years without worrying about how taxes affecting your bottom line.
Reach out to us today to learn more about creating the right tax plan for your Social Security benefits. With a professional and client-focused expert like Saddock Advisory in your corner, you can minimize your tax liabilities.
