Thank you for joining us for Episode 32 of our Money Wisdom Question Series, where we answer common financial and retirement investment questions. Today’s question is, “Can I reduce taxes on my Social Security?”
Your Social Security Taxes Depends on a Formula
The simple answer is yes, you can reduce taxes on your Social Security. However, you might not want to because of what it entails. The amount of taxes that you pay on your Social Security is dependent on a formula that takes into account your other income. This could be investment or earned income or K-1 income from a partnership that you’re a part of. Any other type of income is going to go into this formula that says whether you can increase or decrease taxes on your Social Security.
It Is All Dependent on Your Other Income
Now, here’s the trick. You can get zero taxes on your Social Security if you don’t have other income or if you have a small amount of other income. Some people say, “Well, I want $10,000 a month to live on.” You can still reduce your, quote, “income”. How can you do that? Let’s pretend I had $500,000 in the bank and I’ve already paid taxes on that money. If I live off that cash flow, if I start drawing down $10,000 a month, that does not show up as income on my tax return. So, if I’m doing that, I have no other income.
Let’s say I leave my retirement money alone completely. Maybe I’m under 72 and I don’t have to take any retirement money out. I could actually use bank money that I’ve already paid taxes on and take my Social Security taxes and take them to zero. I get to keep my entire Social Security check.
I know I got a little technical there, but the bottom line is you can reduce taxes on your Social Security income, but you have to manipulate, for lack of a better word, your overall taxable income.
The formula that decides how much money you’ll pay in taxes on Social Security is part of your tax return. They take something called provisional income and that’s what you want to reduce. It gets a little technical, but it’s simpler than you think.
I want to prompt your mind to be thinking about that because you should be dealing with a financial planner that is helping you reduce taxes in all different areas.
Thanks for joining me and I hope you found this information helpful!
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