Social Security benefits are included in your adjusted gross income (AGI) if your total income, which consists in half of your Social Security benefits and other sources of income, exceeds a certain threshold. This can affect the taxation of those benefits and your eligibility for various tax credits and deductions, which in turn can impact your overall tax liability and financial situation. Here’s what you need to know.
A financial advisor can help optimize your retirement plan to minimize your tax liability.
What Is Adjusted Gross Income (AGI)?
Your AGI is the total income that you report on your tax return after accounting for specific deductions. It includes your wages, dividends, capital gains, business income and retirement distributions.
This amount serves as the starting point for calculating your taxable income and tax liability. Here are four additional uses for your AGI:
Itemized deductions: AGI can affect your eligibility to itemize deductions on your tax return, as certain deductions are subject to AGI limitations.
Tax credits: AGI is used to assess your eligibility for various tax credits, such as the child tax credit, the earned income tax credit, and education-related tax credits.
Retirement account contributions: AGI influences your ability to contribute to retirement accounts, such as traditional IRAs and Roth IRAs. High AGI may limit or eliminate your contributions.
Medicare premiums: AGI is used to determine the premiums you pay for Medicare Part B and Part D. Higher AGI can result in higher Medicare premiums.
How to Calculate AGI
Here are five key steps to calculate your AGI:
Gather your income sources: Start by collecting all the sources of income that you received during the tax year. This includes wages, salaries, self-employment income, interest, dividends and rental income, among other income sources.
Take note of income exclusions: Exclude certain types of income that are not used to calculate your AGI. This may include tax-exempt interest, qualified distributions from Roth IRAs and some Social Security benefits.
Calculate your total income: Add up all your income sources to determine your total income for the year.
Make above-the-line deductions: Deduct “above-the-line” deductions, also known as adjustments to income, from your total income. Common above-the-line deductions include contributions to traditional IRAs, student loan interest and educator expenses.
Calculate your AGI: Subtract the total above-the-line deductions from your total income. The result is your AGI. Mathematically, the formula is: AGI = Total Income – Above-the-Line Deductions.
Take note: When using your AGI to determine your taxable income and tax liability, you will report your AGI on the first page of your federal tax return (Form 1040).
A financial advisor can help you with a tax strategy and filing.
You will have to pay federal income tax on your Social Security benefits when your income surpasses a certain threshold. This means that if your combined income of Social Security benefits and other taxable incomes (these include wages, self-employment, interest and dividends, among other sources that have to get reported on your tax return) are above the IRS limit, you could pay taxes up to 85% of your benefits.
The IRS rule for taxes on your Social Security benefits are as follows:
Individual tax filers with a combined income between $25,000 and $34,000 may have to pay income tax up to 50% of Social Security benefits. And those with more than $34,000 could get taxed up to 85%.
Joint tax filers with a combined income between $32,000 and $44,000 may have to pay income tax up to 50% of benefits. And those with more than $44,000 could get taxed up to 85%.
Take note: If you’re married and file taxes separately, the Social Security Administration says that you will probably have to pay taxes on your benefits.
Tips for Lowering Your AGI
Reducing your AGI can help lessen your overall tax liability. Here are three common tax strategies:
Maximize retirement contributions: Your retirement account contributions can get deducted from your total income.
Find tax deductions: Depending on your situation, there could be a number of tax deductions that you’re eligible for. These can include student loan interest deductions, medical expense deductions and property tax deductions, among others.
Utilize tax credits: There are also many tax credits that you might qualify for. These can include the earned income tax credit (EITC), the child tax credit, the saver’s credit and education credits, among others.
You can also consider speaking with a financial advisor if you're interested in professional guidance based on your goals.
Bottom Line
It’s important to ensure that you calculate your AGI accurately as it impacts your tax liability, eligibility for tax credits and other tax-related matters. You can also lower your AGI strategically to minimize your tax liability and increase your eligibility for some tax credits. Keep records of your income and relevant deductions, and consider consulting with a tax professional or using tax software to help with the calculation.
Tips for Retirement Planning
Social Security benefits are just one of many things you need to prepare for in retirement. A financial advisor can help you create a retirement plan to reach your long-term financial goals, including factoring in potential Social Security benefits. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
You can use a tool, like a free retirement calculator, to help estimate if you’re saving enough for your retirement goals.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid -- in an account that isn't at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
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