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If you earn other income in addition to your Social Security, you could be taxed unless you know this one trick. Learn how to save, plus three other slick tricks to slash what you owe the IRS and keep Uncle Sam from emptying your wallet.
The good news is if Social Security is your sole income, generally speaking, it is unlikely that it will meet the criteria that make it taxable.
According to AARP, the portion of your Social Security benefits that is subject to taxation will vary according to your income level. You’ll only be taxed if:
-Up to 50 percent of your benefits if your income is $25,000 to $34,000 for an individual single filer, head of household, or qualifying surviving spouse; $25,000 if you’re married filing separately and lived apart from your spouse for the entire year,
-Up to 50 percent of your benefits if your income is $32,000 to $44,000 for a married couple filing jointly.
-Up to 85 percent of your benefits if your income is more than $34,000 (individual) or $44,000 (couple).
-$0 if you’re married, filing separately, and lived with your spouse at any time during the tax year, according to the IRS.
The problem, therefore, comes if you have other income in addition to your Social Security that would push you over the threshold limits.
No matter what your income, no one pays taxes on more than 85 percent of their Social Security benefits.
If the additional income you are earning is causing your Social Security to be taxed, one way of offsetting that would be to earn less income and replace that money with withdrawals from your retirement accounts.
You can tap into IRAs or 401(k)s as early as 59 1/2 years of age without penalty. This would lower your tax burden, assuming the income in your IRAs or 401(k)s were pre-taxed.
One caveat: Pulling money out early from those accounts could reduce several years of compound interest on your investments, so you’ll have to weigh both sides carefully, Yahoo Finance reports.
Here are three other moves you could make that can help reduce what you may owe on your taxes.
If you are a retiree over the age of 70.5 years, you can make a qualified charitable distribution (QCD). This occurs when you transfer money from a traditional IRA to a qualified charity. This ensures that the money you withdraw counts as a donation and not ordinary income. The result is it reduces your taxes on your annual retirement benefits.
The various areas in which you receive income – wages, business income, royalties, rental income, dividends, and more – all count toward your gross income. To minimize your taxes, deducting legitimate business expenses is the best way to reduce taxable income.
In addition to owing federal taxes each year, Americans who live in certain states also have to pay a percentage of their income in state taxes. However, some states have much lower percentage rates than others, while some have no state income tax at all.
If you can work from anywhere, as is the case with remote workers who never have to go to an office and always work from home, moving to a state with no income taxes is the equivalent of receiving a raise in pay equal to the percentage of state income tax you’ll save.
For example, if you live in California and are in the highest income bracket of 12.3%, that’s a humongous chunk of money you get to keep simply by moving to another state.
Currently, nine states in the US have no state income tax. They are Alaska, Florida, Nevada, New Hampshire, South Dakota, Tennessee, Texas, Washington, and Wyoming.
