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I’m in my first year of required minimum distributions of $36,000, which is causing me to be taxed on my $33,000 in Social Security benefits. What is a good strategy to reduce my RMDs below $25,000 so my Social Security benefits do not become taxable? Would taking a lump sum from my pre-tax IRA and paying the taxes make sense to avoid the yearly taxable event with my Social Security benefits? Would gifting money to my children/grandchildren (thereby reducing the RMD base) have negative tax consequences for my children/grandchildren? Would it have a positive tax benefit for me?
– Laura
This is a great question Laura, and there are a few strategies that might help you reduce the long-term tax bill on your Social Security benefits. Let’s first explore how Social Security income is taxed and then get into the options available to you.
Do you need additional help managing your RMDs or tax liability in retirement? Consider speaking with a financial advisor today.
Whether your Social Security income is taxed, and how much of it is taxed, depends on your tax filing status and your other income. The first step is determining your provisional or “combined income,” which is simply the sum of the following three variables:
Adjusted gross income (AGI)
50% of Social Security benefits
If you’re single, you would be subject to the following tax thresholds:
If your combined income is less than $25,000, none of your Social Security benefits are taxed
If your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits are taxed
If your combined income is greater than $34,000, up to 85% of your Social Security benefits are taxed
If you are married and file jointly, the following limits apply:
If your combined income is less than $32,000, none of your Social Security benefits are taxed
If your combined income is between $32,000 and $44,000, up to 50% of your Social Security benefits are taxed
If your combined income is greater than $44,000, up to 85% of your Social Security benefit is taxed
Keep in mind that the 50% and 85% limits are not tax rates. They simply reflect the maximum portion of your Social Security benefits that could be subject to tax. The taxable amount is then added to your other income and the regular income tax rates and brackets are applied. (A financial advisor may be able to help you plan for Social Security, and this free matching tool can help you find an advisor.)