Will you have to pay tax on your Social Security income? Well, the answer depends on your provisional income.
Now, if you’re wondering what do I mean by provisional income, then let me tell you that it’s nothing but adjusted gross income. This does not include one-half of Social Security benefits and nontaxable interest.
Your adjusted gross income
- 1 Wage
- 2 Pension
- 3 Investment
- 4 Income from rental property
- 5 IRA
When you don’t have to pay tax on SSI
- Your adjusted gross income is less than $25,000 and you file your taxes as single
- You file your tax return jointly but your adjusted gross income is less than $32,000
When Your SSI is taxable
- 1 50% of your SSI will be taxable provided your provisional income ranges between $25,000 and $34,000 and you’re single
- 2 50% of your SSI will be taxable provided your provisional income ranges between $32,000 and $44,000 and you’re married and file tax jointly
- 3 85% of your SSI will be taxable when you’re single and your provisional income is above $34,000
- 4 85% of your SSI will be taxable when your provisional income is above $44,000 and you’re married filing jointly
What you can do to avoid paying tax on SSI
- Donate to charity: If you’re above 70 years, then you can donate up to $100,000 every year from your IRAs to charitable organizations tax-free. This gift will be considered as the required minimum distribution. But, it won’t be included in your adjusted gross income.
- Take out money from Roth IRAs: Tax-free withdrawals from Roth 401(k) or Roth IRA will not be counted in your AGI. So a good move is to roll over money to Roth IRA from traditional IRA or 401(k) much before you start receiving SSI. This would help you avoid tax after retirement.
- Invest carefully: Try to organize your portfolio in such a way that it would help to minimize the income from your investments. It’s better to do this especially when your income is being reinvested. Remember, you’re reorganizing income and triggering tax you wish to avoid. It’s better to focus on growth-oriented portfolio.
There’s hardly anything you can do when your income is above $44,000. You can decrease your income level just to avoid paying tax. So, it would be wrong to focus only on Social Security tax. Instead, you can focus on tax-efficiency.
Check out the worksheet in IRS Publication 915 to compute your taxable Social Security benefits. For more information, you can also see the Social Security Benefits Planner: Income Taxes and Your Social Security Benefits.