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Taxes On Your Social Security Benefit

The following is an excerpt from:
“Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return).You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service (IRS) rules. If you:

  • file a federal tax return as an “individual” and your combined income* is
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return, and you and your spouse have a combined income* that is
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $44,000, up to 85 percent of your benefits may be taxable.” (end of excerpt)

Can Anything Be Done To Reduce Tax on Social Security?
In short: It depends. Purchasing a tax-deferred annuity may or may not effectively reduce the tax that is due on Social Security each year. It all depends on the end result and how much income is counting towards the calculation used to determine the tax on social security. For some individuals or married couples filing jointly, a tax-deferred annuity will result in lower taxes paid on social security. However, some people may benefit from lower taxes by purchasing a tax-deferred annuity if they actually don’t withdrawal the interest earned in a given year, thereby deferring the tax until a later date.  One argument against deferring taxes in retirement is the idea that future taxes will be higher than they are today. While this certainly seems to be plausible, there are factors that could mitigate the future tax that would eventually be due. If someone does benefit with a tax deferred annuity by paying lower taxes on their social security, keep in mind that the tax that was avoided on social security never has to be repaid in the future, so there could be a win there. Also, if the annuity is inherited with the deferred tax yet unpaid, the heirs have options to pay the tax over several years and not all at once.  With all of that said, there is a provision in some annuities whereby the funds may be withdrawn 100% tax-free if those funds are used to pay for home health care or long term care. This only applies to certain tax deferred annuities that have those provisions contractually built into the annuity from the onset. In other words, this does not apply to most all annuities.  Contact us to discuss your options for tax-deferred annuities and learn how you may benefit from them.

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Our CPA Platform is comprised of financial solutions that we make available through our CPA relationships. The CPA Platform provides details regarding specific financial products that can effectively reduce taxes for the end-user. If you are a CPA that would like more information regarding our CPA Platform, please contact us for more information.

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