What Can I Do to Lower the Tax on My Social Security?
Social Security recipients need to make the most of their income, since the maximum Social Security payment was $2,346 a month in 2010. Social Security retirement covers approximately 40 percent of the preretirement income of the worker, and the retiree needs about 80 percent, according to the Social Security Administration. Retired seniors must find an amount equal to Social Security benefits every month to make retirement work. Additionally, they must find the money to pay the Internal Revenue Service at income tax time.
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Significance
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The Internal Revenue Service does not tax Social Security benefits unless the recipient has additional income. The Social Security recipient gets a break on federal taxation if Social Security is the only income, but recipients who have non-taxable interest and other income counted in the adjusted gross income figures on IRS Form 1040 may pay tax on Social Security benefits.
Taxation
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Federal taxation of Social Security applies to individuals who make more than $25,000 in combined income. Combined income is the adjusted gross income plus nontaxable interest and 50 percent of Social Security income for the year. Individuals who have a combined income from $25,000 to $34,000 a year see 50 percent of Social Security benefits taxed. An individual earning over $34,000 a year in combined income sees 85 percent of Social Security benefits taxed. Married filing jointly incurs 50 percent of Social Security benefits taxed at $32,000 to $44,000 and 85 percent of Social Security benefits taxed for a combined income above $44,000. Keeping combined income below the threshold can lower taxes on Social Security.
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Considerations
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Reducing taxes is a realistic goal for the retiree, but it may require a move to another state, since some states tax retirement benefits along with the IRS. Nine states do not have income tax and several more do not tax Social Security benefits, according to the Kiplinger website.
Warning
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You may be trading off one kind of tax for another. Some states have high sales tax and higher property taxes, so even though you do not see taxation of your Social Security benefits, you see no reduction of tax liability.
Potential
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Possibilities exist to lower tax liability on Social Security at the federal and state levels. At the federal level, this requires a combined income figure below the taxing threshold or below the 85 percent taxing threshold. State taxation comes in several forms -- sales tax, property tax, income tax, and estate and inheritance taxes. Even cigarette and fuel taxes vary from state to state and can affect the bottom line of a retiree. Find a state that is retirement friendly and that suits your personal lifestyle. If you choose not to own a home, property taxes are not critical. State sales tax on food may be.
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