Everyone must make applicable Social Security contributions on income, even those working past full retirement age. Working past full retirement age may also increase Social Security benefits in the future because Social Security contributions continue to be paid in.
- Depending on your income, you might pay income tax on part of your Social Security income.
- For 2020, couples filing jointly with combined income between $32,000 and $44,000 will have to pay tax on up to 50% of their benefits. If combined income is more than $44,000, they'll be taxed on up to 85% of their benefits.
- For singles, those income thresholds are between $25,000 and $34,000 for 50%, and more than $34,000 for 85%.
- Some states will also tax Social Security income separate from what the IRS demands.
Income and Taxation of Benefits
Continuing to work, however, may lower current payments, if any, taken during the year full retirement age is reached, according to a Social Security Administration limit, which changes every year.
If full retirement age is reached in July, for instance, the total benefit income earned from January to July must be below the limit, or Social Security benefits are lowered by $1 for every $3 of income over the limit, which is $48,600 for 2020.
That money is held by the Social Security Administration and repaid incrementally once the taxpayer is no longer working. There are no limits on income earned past the month that full retirement age is reached when the full benefit amount is paid no matter how much income is earned.
However, taking Social Security benefits while continuing to work may have the unexpected negative consequence of bumping a taxpayer into a higher tax bracket. Most people forget that a certain percentage of Social Security benefits may be taxed—up to 85%—depending on filing status and combined income, including half of Social Security benefits.
Some states also tax Social Security benefits. It is possible to have taxes withheld from Social Security benefit payments by filling out IRS Form W-4V or requesting a Voluntary Withholding Request Form online. There are currently 13 states in which your Social Security benefits may also be taxable at the state level, at least to some beneficiaries. If you live in one of those states—Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, or West Virginia—check with the relevant state tax agency. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.
How to Lower Your Social Security Taxes
There are several remedies available for those who are taxed on their Social Security benefits. Perhaps the most obvious solution is to reduce or eliminate the interest and dividends that are used in the provisional income formula. In both of the examples shown above, the taxpayers would have reduced their Social Security tax if they hadn't had declarable investment revenues on top of their other income.
Therefore, the solution could be to convert the reportable investment income into tax-deferred income, such as from an annuity, which will not show up on the 1040 until it is withdrawn. If you have $200,000 in certificates of deposit (CDs) earning 3%, which translates into $6,000 a year, that will be counted as provisional income. But the same $200,000 growing inside an annuity, with the interest reinvested back into the annuity, will effectively yield a reportable interest of $0 when computing provisional income.
Generally, annuities become taxable income when they are taken as distributions depending on the account type. Therefore, virtually any investor who is not spending all of the interest paid from a CD or other taxable instrument can benefit from moving at least a portion of his or her assets into a tax-deferred investment or account.
Another possible remedy could be to simply work a little less, especially if you are at or near the threshold of having your benefits taxed. In the first example listed above, if Jim were to move his taxable investments into an annuity and earn $1,000 less, he would have virtually no taxable benefits. Shifting investments from taxable accounts into a traditional or Roth IRA will also accomplish the same objective, provided funding limits have not been surpassed.
Steve Stanganelli, CFP®, CRPC®, AEP®, CCFS
Clear View Wealth Advisors, LLC, Amesbury, MA
As long as you are working and earning an income, whether in a self-employed capacity or for an employer, then you will be required to contribute to Social Security.
Whether or not you need to pay taxes on your Social Security benefits, however, depends on your modified adjusted gross income (MAGI). If your MAGI is above a certain threshold for your filing status (e.g. single or married filing jointly), then your benefits would be taxable. Up to 85% of a taxpayer’s Social Security benefits are taxable.