How Can You Minimize Tax on Social Security Benefits?

• Find out how income factors in.
• Learn how your filing status affects taxes on your Social Security benefits.
• Find out if the 85% maximum taxable amount applies to you.
• Discover the base amounts used for your filing status.
• Find out how to defer other income, such as IRAs distributions.
• Learn how to maximize IRA distributions.
• Learn about the gambling gotcha.

Whether your Social Security benefits are taxable (and, if so, the amount taxed) depends on a number of issues. Fiducial offers the following facts to help you understand the taxability of your Social Security benefits.

For this discussion, the term “Social Security benefits” refers to the gross amount of benefits you receive; in other words, the amount before reduction due to payments withheld for Medicare premiums. The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement, or reaching the eligibility age. Supplemental Security Income (SSI) benefits do not factor in the computation because they are not taxable under any circumstances.

• The amount of your Social Security benefits that are taxable (if any) depends on your total income and marital status.

  o Is Social Security your only source of income? Then, it is generally not taxable.

  o On the other hand, if you have a significant amount of other income, as much as 85% of your Social Security benefits can be taxable.

  o Are you married and have lived with your spouse at any time during the year but filed a separate return from your spouse using the married filing separately status? Then, 85% of your Social Security benefits are taxable regardless of your income. This prevents married taxpayers who live together from filing separately, thereby reducing the income on each return and thus reducing the amount of Social Security income subject to tax.

How to compute tax on Social Security Benefits

The following quick computation can be done to determine if some of your benefits are taxable:

Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.

Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

The base amounts are:

o $32,000 for married couples filing jointly;

o $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and

o $0 for married persons filing separately who lived together during the year.

How IRAs come into play

Where taxpayers can defer their “other” income, such as Individual Retirement Account (IRA) distributions, from one year to another, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits for at least one of the years. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.

Individuals who have substantial IRAs – and are not required to make withdrawals or are making their post-age 72 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone’s circumstances are different, however, and what works for one person may not work for another.

Gambling Tax Gotcha

You must report gambling income in full as income and losses as an itemized deduction. So, the gross gambling winnings increase a taxpayer’s adjusted gross income (AGI) for the year. This can cause more of your Social Security benefits to be taxable, even if gambling losses exceed your winnings, simply because winnings are added to the AGI and losses are an itemized deduction.

Have questions about how these issues affect your specific situation? Want to do some tax planning? Call Fiducial at 1-866-FIDUCIAL or make an appointment at one of our office locations to discuss your situation.

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