Maximize Your Green Business Tax Savings
Category: Business
If you’ve reached the age where you can receive Social Security benefits, congratulations! That means you’ve worked hard and paid into the system your entire working life.
However, many retirees may also wonder whether they must pay income taxes on their Social Security. If these benefits are their only source of retirement income, the question becomes especially urgent.
So, if you are ready to cash in on your Social Security, will you owe the government some money?
The answer is maybe. As with the answers to many tax-related questions, it all depends. Factors such as your income level and filing status can impact whether or not you will have to pay and, if so, how much.
To explore this topic further, continue reading below. We’ll examine questions like:
Social Security benefits are subject to federal income tax for about 40% of Americans, according to the Social Security Administration.
This usually happens because the retiree has other substantial income, such as wages, self-employment, interest, dividends, or other taxable income. When this additional income combines with the Social Security benefits, a retiree’s income level will generally exceed a certain threshold, causing taxation to kick in. (That threshold may differ from person to person, depending on their filing status and the amount of their benefits.)
To put it more simply, many benefit recipients will owe some tax on their Social Security.
There is some good news, though — only a portion of your benefits will be subject to tax, regardless of the amount you receive.
For most people, only up to 50% of their benefits are taxable. However, up to 85% of your benefits can be taxable if either of the following situations applies:
In either of those cases, the taxable percentage of your Social Security benefits will increase to 85%. Fortunately, it will never go any higher. No retiree ever has to pay taxes on 100% of their benefits, making Social Security tax-efficient compared to other retirement plans with fully-taxable distributions.
On the other hand, you may also need to pay state taxes if you live in one of the thirteen states which also tax Social Security benefits.
If you are unsure what part of your income is taxable, you may wish to consult IRS Notice 703, which includes a worksheet designed to help you determine if your benefits are taxable. Furthermore, the IRS’s Interactive Tax Assistant (ITA) is a valuable tool that may provide more information, including what part of your income is taxable and what possible complications may arise in your circumstances.
Most people who work as employees in the United States must pay Social Security and Medicare taxes. These payments contribute towards their coverage under the system. They are usually deducted by their employer from each wage payment, regardless of whether or not the employee expects to qualify for Social Security benefits. (Those for whom taxes are withheld in error may seek a refund from the employer or the IRS.)
Those with the legal right to receive the benefits are included in that person’s taxable income (if taxable).
For example, if you receive Social Security benefits as a surviving spouse caring for two dependent children, the two children may also receive benefits as dependents of their deceased father; the benefits are payable to you. However, when calculating the benefits’ taxable portion (if any), you must only use the amount paid for your use.
Since the IRS determines the taxation of Social Security benefits by combined income levels and filing statuses, age is not a factor. That means there is, unfortunately, no age at which you can avoid taxation if it applies to your circumstances.
However, once you reach full retirement age, the IRS can no longer withhold your benefits if they exceed the abovementioned threshold combined with your other forms of income.
Full retirement age varies based on when you were born. The age for full retirement benefits is 66 if you were born between 1943 and 1954. It increases gradually to 67 from 1955 to 1960, after which it remains 67 for anyone born after 1960.
In 2022, you are eligible for full Social Security benefits if born before September 2nd, 1956.
Although there is no way to avoid partial taxation on your benefits if your combined income exceeds the threshold, there are some strategies you may be able to use to reduce taxes on your Social Security.
For example, you may reduce your taxable benefits by reallocating investments that generate income, which pushes you over the threshold. For example:
You may also consider taking distributions from your 401(k) or Traditional IRA in your sixties (they become penalty-free after age 59 ½ or even 55 in some cases) before signing up for Social Security to reduce your Social Security income tax bill. Likewise, saving in a Roth 401(k) or Roth IRA can also be helpful, as distributions from such accounts are not taxable after the accounts are five years old, meaning they don’t contribute to your Social Security taxes.
If you live in one of the thirteen states that also tax Social Security, check to see if your state has exceptions for low-income retirees. (Those states are: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.)
The financial side of retirement can be frustrating. You’ll pay a hefty tax if you take your benefits early. On the other hand, if you wait until you reach full retirement age, your benefits will increase, but you will have to make do until then. And if you want to minimize your eventual tax burden when you start receiving your benefits, you also need to be conscious of whether or not your income will cross the threshold.
It can be enough to make your head spin! Fortunately, you are not powerless or alone.
With the right, strategic approach, you can understand the tax implications of your Social Security benefits and make the most of your income circumstances.
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Jeff Coyle, CPA, Partner of Rosenberg Chesnov, has been with the firm since 2015. He joined the firm after 20 years of business and accounting experience where he learned the value of accurate reporting, using financial information as a basis for good business decisions and the importance of accounting for management.
He is a diligent financial professional, able to manage the details and turn them into relevant business leading information. He has a strong financial background in construction, technology, consulting services and risk management. He also knows what it takes to create organizations having built teams, grown companies and designed processes for financial analysis and reporting.
His business experience includes:
Creating and preparing financial reporting, budgeting and forecasting.
Planning and preparation of GAAP and other basis financial statements.
Providing insight on financial results and providing advice based on those results.
Jeff also has a long history of helping individuals manage their taxes and plan their finances including:
Income tax planning and strategy.
Filing quarterly and annual taxes.
Audit support.
General financial and planning advice.
Prior to joining the firm in 2015, Jeff was in the private sector where he held senior financial and management positions including Controller and Chief Financial Officer. He has experience across industries, including construction, technology and professional services which gives him a deep understanding of business.
Jeff graduated from Montclair State University, he is a CPA and member of the American Institute of Certified Public Accountants, New York State Society of Certified Public Accountants and New Jersey State Society of Public Accountants.
Jody H. Chesnov, CPA, Managing Partner of Rosenberg Chesnov, has been with the firm since 2004. After a career of public accounting and general management, Jody knows the value of good financials. Clarity, decision making, and strategy all start with the facts – Jody has been revealing the facts and turning them into good business results for more than three decades.
He takes a pragmatic approach to accounting, finance and business. His work has supported many companies on their path to growth, including helping them find investors, manage scaling and overcome hurdles. His experience and passion for business reach beyond accounting and he helps businesses focus on what the numbers mean organizationally, operationally and financially.
He has a particular expertise in early-stage growth companies. His strengths lie in cutting through the noise to come up with useful, out of the box, solutions that support clients in building their businesses and realizing their larger visions.
Prior to joining the firm in 2004, Jody was in the private sector where he held senior financial and management positions including General Manager, Chief Financial Officer and Controller. He has experience across industries, which gives him a deep understanding of business.
Jody graduated with a BBA in Accounting from Baruch College, he is a CPA and member of the American Institute of Certified Public Accountants and New York State Society of Certified Public Accountants.
In addition to delivering above and beyond accounting results, Jody is a member of the NYSCPA’s Emerging Tech Entrepreneurial Committee (ETEC), Private Equity and Venture Capital Committee and Family Office Committee.
He is an angel investor through the Westchester Angels, and has served as an advisor for many startup companies and as a mentor through the Founders Institute.