Reducing Tax on Social Security Benefits
Social Security tax payments can significantly reduce the amount of money that goes into the pockets of pensioners. This is definitely bad news for retirees who only get by on fixed income. Fortunately, there is a way for you to reduce or even avoid paying taxes on social security benefits. Just like in other forms of income taxes, you simply need to keep your taxable income well within the limits set by the IRS to ensure that you enjoy every penny of your social security income. Here are some of the most common ways to help you reduce tax on social security benefits.
Defer Part of Your Total Income or Investments
Deferring a part of your income or total investments is a good way to decrease your social security tax. One of the best options is to put money in deferred annuities so that you will not have a huge taxable income until after the annuities have matured. Investing in deferred annuity products would mean that the income you are supposed to receive now will be reallocated to a later date. Also, any interest from deferred annuities will not be included in the computation of the taxable social security income.
If you have huge cash deposits or investments in stocks or bonds, you can also put them in deferred fix annuities. By doing so, any income you receive from such investments will no longer be part of the taxable income. As a result your total income will be smaller and you will have a better chance of not being included in the IRS-prescribed income brackets where social security taxes kick in.
Reallocate Income and Investments into IRA
If you are still receiving income or you have other taxable investments, it is a smart idea to transfer them into an IRA account. You can sell your investments and buy them again via traditional or Roth IRA. This will prevent you from constructively getting your hands on a considerable amount of income.
Just the same, if you are to receive lump sum retirement benefits from a savings account set up by your employer, you can also opt to put those benefits in your existing IRA account. You see, once you get hold of the benefits established by your employer, the IRS will view it as a withdrawal and the money you take becomes fully taxable. Again, for this to work you also have to make sure that you do not go beyond the income bracket limits set by the IRS.
Opt for Lump Sum Social Security Benefits
Under Internal Revenue Code Section 86(e), a person who receives social security benefits on a lump sum basis can ask that the taxes on such benefits be minimized. In effect, this will reduce the social security tax that you have to pay. After getting your lump sum money, make sure to put it into a deferred annuity product or IRA account.
Work Less and Minimize Taxable Income
If you plan to work, even if you are already receiving social security benefits, you can avoid social security tax on those benefits by working less and earning a smaller income. Other than transferring your investments to deferred annuities or IRAs, you always have to make sure that the total income you receive does not reach the thresholds set by the IRS.
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