Due to a series of circumstances, there’s a good likelihood that a large number of Social Security beneficiaries will pay more taxes on their payments this year than in previous years. This could persuade a large number of them to take action to reduce their future tax obligations.
Taxation of Social Security benefits is based on specified income criteria and provisional income. The amount of taxes you must pay increases with your income.
Provisional income is calculated by adding the total of your tax-exempt interest, adjusted gross income (which includes jobs and investments) and other non-Social Security items (such Social Security benefits), as previously reported by GOBankingRates.
If your provisional income is less than $25,000, Social Security benefits are not taxed for single taxpayers. If you file a combined return and are married, that amount increases to $34,000. If your provisional income is between $25,000 and $34,000 for single filers or between $32,000 and $44,000 for joint filers, you may be subject to taxation on up to half of your Social Security benefits. If your income exceeds those thresholds, you may be subject to taxes on up to 85% of your benefits.
You will pay more in taxes this year than usual if your 2023 provisional income exceeded the criteria. That may be the case for Americans who, as part of the Great Resignation, resigned in 2021 and began receiving Social Security benefits right away. In this scenario, their provisional income will include the job income they earned the previous year, which may push them above the threshold.
What steps can you take to reduce your future Social Security tax obligation? Planning ahead is a smart place to start. Consider the sources of income you anticipate having over the next five to ten years, as well as any potential effects they may have on your provisional income criteria.
Rose Swanger, the principal of Advise Financial and a certified financial planner, told MarketWatch that “early planning is the key.”
Choosing to make a qualified charitable donation (QCD), which allows you to donate your necessary minimum distributions to charity, is one approach to reduce your tax liability. QCDs are not subject to income taxes.
Transforming your retirement funds into Roth accounts is an additional choice. According to Michelle Gessner, a certified financial advisor and the founder of Gessner Wealth Strategies, withdrawals from Roth 401(k) plans or IRAs are not taken into account when determining provisional income. To find out how much can be converted without putting you in a higher tax rate, it’s a good idea to speak with a licensed financial planner or tax preparer before making any changes.
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