Social Security recipients are likely to pay more taxes on their benefits this year than in previous years, a situation that may persuade many of them to take steps to reduce their tax bills in the future.
How Can You Reduce Your Social Security Tax – Best Tips(Photo: UNA)
Retirees Will Face A Higher Tax Bill This Year
Provisional income and income thresholds are used to calculate Social Security benefits. The more money you make, the more taxes you’ll have to pay. Because of the amount of provisional income they earned in 2021, many retirees will face a higher tax bill this year.
As previously reported by GOBankingRates, provisional income is calculated by adding half of your Social Security benefits, tax-free interest, and other non-Social Security items (such as jobs or investments) to your adjusted gross income.
If your provisional income is less than $25,000, your Social Security benefits are not taxed. If you’re married and filing a joint return, the amount increases to $32,000. If your provisional income is $25,000 to $34,000 for single filers or $32,000 to $44,000 for joint filers, up to half of your Social Security benefits may be taxable. Above those income levels, up to 85% of your benefits may be taxable.
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If your provisional income in 2021 exceeded the thresholds, you will face a higher-than-usual tax bill this year. That could be the case for Americans who retired in 2021 as part of the Great Resignation and then immediately began claiming Social Security. In this case, their previous year’s work income will be included in their provisional income, potentially pushing them over the threshold.
If you postponed your required minimum distributions (RMDs) in 2020, you may have to pay more in Social Security taxes. According to MarketWatch, federal COVID-19 relief packages allowed Americans to forego RMDs in 2020. If you haven’t started drawing down your retirement account balances by the age of 72, you must withdraw that amount each year. If you postponed your 2020 RMD, you’ll most likely have to take out more money in 2021, which could push you over the threshold.
According to the Social Security Administration, roughly 40% of Social Security recipients pay taxes on their benefits. According to the Social Security Trustees Report, approximately $10.6 billion more in taxes will be paid on benefits this year than last year.
What can you do to reduce your future Social Security tax liability? A good first step is to start planning, which includes considering the income sources you can expect over the next five to ten years and how those sources may affect your provisional income thresholds.
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