Monthly Archives: August 2016

4 Strategies to Avoid Social Security Taxes

Social Security Card and Tax Forms

Is it possible to eliminate Social Security taxes this year?

We recently discussed how your Social Security benefits are taxed, but did you know there may be a few ways to reduce or avoid Social Security taxes altogether?

While not the only possible solutions, here are four strategies you may want to consider.

Avoid Going Over

The most straightforward way to avoid social security taxes may be to stay below the income threshold. If you are single, this means you can generate no more than $25,000 worth of annual income. If you are a couple filing jointly, then this means you can have no more than $32,000 of annual combined income.*

Use Your Roth IRA

Contributions to a Roth IRA are made with post-tax dollars, so any withdrawals you take in retirement are tax-free**. This means any qualified distributions you take from a Roth IRA do not increase the total income for your Social Security taxes. You may want to consider this as a way to supplement your retirement income without increasing your tax burden.

Tap into Traditional Accounts

If you have a conventional savings or money market account, then you can make withdrawals that may not affect your Social Security tax amount. Instead of using your pre-tax investments, your traditional accounts may be able to keep you under the income threshold.

Donate Your RMD

When you take your required minimum distributions (RMDs), you can donate up to $100,000 of it to charity without it being counted as a part of your adjusted gross income. So even though you are required to take the distributions, you have options that may be able to help you reduce Social Security taxes. Read more about donating your RMD to charity.

Again, these are not the only available solutions for reducing or eliminating the taxes from your Social Security benefits. You can get more information by reaching out to Guidant Wealth Advisors via our contact page.

*According to IRS 2015 Tax Codes for Social Security

** Withdrawal of Roth IRA earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax.

The information in this material is for general information only and is not intended to provide specific tax advice for any individual. Please consult with your tax advisor before making any decisions.

Can I Take Early IRA Distributions?

It can be tempting to withdraw money prematurely from your individual retirement account (IRA), especially if you come upon hard times or need extra cash for an important purchase. If you are younger than 59-1/2 years old, then you may be wondering if taking early IRA distributions is even an option.

The short answer is: yes, you can take early IRA distributions before you turn 59-1/2.

Before you do, however, understand what it can mean for you:

  •      Early IRA distributions are penalized. This means you may have to pay a 10 percent tax rate on the amount you withdraw from the account. There are exceptions to the 10 percent early withdrawal tax.
  •      You may be able to avoid the 10 percent tax if you take the distribution in substantially equal periodic payments over your life expectancy.
  •      You will owe income tax on your withdrawal, whether or not you owe the 10 percent penalty tax. The one exception is if your withdrawal comes from a Roth IRA, because the money you contributed was already taxed before going into the account. Please keep in mind that the withdrawal of earnings from the Roth IRA will incur the 10% penalty tax prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later.

If you are looking for ways to avoid the 10 percent early withdrawal tax, then we recommend speaking with your financial advisor or investment strategist. The methods can be complicated, and you don’t want to end up with errors that cost you more money in the long run.

Exercise careful consideration before taking early IRA distributions. The extra funds can help you achieve your financial and personal goals, but with the extra tax burdens you want to make sure it doesn’t negatively impact your future.
The information in this material is for general information only and is not intended to provide specific tax advice for any individual.

How Are My Social Security Benefits Taxed?

Social Security Benefits

Whether you will soon apply for your Social Security benefits or you already receive them, you may be wondering how much of that income you actually get to keep.

This can be especially important information for retirees who depend almost entirely on their benefits to maintain their lifestyle.

Let’s take a look at how your Social Security benefits are taxed in various situations.

Below the Income Threshold

Social Security benefits are not taxed at all if you qualify for one of two conditions:

  •      You are a single retiree with a combined income of less than $25,000 annually, or
  •      You are a couple filing joint tax returns and your combined income is less than $32,000 annually.

This usually means you receive little to no supplemental cash from retirement plan distributions or other earnings, and you live almost completely off your benefits.

Above the Income Threshold

If your combined income is above the thresholds mentioned above, then your Social Security benefits may be taxed at one of two levels:

  •      If you are a single retiree with a combined income above $25,000 but below $34,000; or, you are a couple filing jointly and your combined income is above $32,000 but below $44,000, then up to 50 percent of your benefits may be taxed.
  •      If you have a combined income above these amounts, then up to 85 percent of your benefits may be taxed.

How do you know if your combined income is above the threshold? It’s calculated as your adjusted gross income plus nontaxable interest earnings and half of your Social Security benefit.

For more information on how benefits can be taxed, visit the Social Security Administration.

– The opinions voiced in this material are for general information only and are not intended to provide specific tax advice or recommendations for any individual.