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Social Security Taxes – How to Reduce Taxes on your Social Security Benefits

You can reduce the social security taxes on your social security benefits and this article explains how. The basic rule is that social security benefits are taxable if your modified adjusted gross income (your adjusted gross income plus tax exempt interest plus exclusions per IRS publication 915) exceeds the following limits:

Percent of social security income taxed Single, head of household, qualifying widow(er), or married filing separately and you lived apart from your spouse for all of the year, Married people
0% Less than $25,000 Less than $34,000
Up to 50% $25,001-$34,000 $34,001 to $44,000
Up to 85% More than $34,000 More than $44,000

 

Therefore, if you can engineer your includable income below these limits, you may be able to reduce or eliminate taxes on social security income. This may be possible using annuities. While this is not a recommendation to buy annuities just because they can help reduce the tax on your social security income, the table below illustrates how it is possible to reduce social security taxes in some circumstances.


Using Fixed Annuities to Reduce Tax on Social Security Benefits

Hypothetical
Illustration–Not Indicative Of Any Specific Product

Scenario #1 Interest from CDs Scenario #2 Interest from Tax-Free Bonds Scenario #3 Fixed Annuity Interest (Not Distributed)
Interest

$10,000

$10,000

$10,000

Pension

$25,000

$25,000

$25,000

Social Security Income

$20,000

$20,000

$20,000

Total Income

$55,000

$55,000

$45,000

Social Security
subject to Tax

$6,850

$6,850

$1,500

Adjusted Gross Income

$41,850

$31,850

$26,500

Total Federal
Tax

$2,691

$1,298

$763

You can see from the above table that if our hypothetical couple Mr. and Mrs. Smith move money from CDs to municipal bonds to fixed annuities, the amount of their social security income subject to tax changes, as does their total federal tax. Their lowest tax situation is with the deferred annuity. If they need to withdraw the interest from the annuity, this solution won’t help them and they gain only if they allow the interest to reinvest.

Now let’s look at income limitations when collecting social security benefits:

Social Security Retirement Income — Earn All You Want

3 thoughts on “Social Security Taxes – How to Reduce Taxes on your Social Security Benefits

  1. larry steuer says:

    Do the social security tax rates apply if I am collecting Social Security at 62? In other words are the tax rates for social security different for a 62 year old versus a 65 year old.

  2. bobrichards says:

    no difference

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