VIDEO: How to Reduce Income Tax on Social Security Benefits

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Video Transcript: How to Reduce Income Tax on Social Security Benefits

Welcome to this very special Retirement Education Video Series brought to you by FTMDaily.com. Today we’re going to be talking about how to reduce taxes on your Social Security income.

We recently received a question from a reader who said, “I am tired of paying income taxes on my monthly Social Security Benefit. Is there any way to reduce the level of taxes I pay each year?”

Well, fortunately, the answer is “yes”. You can substantially reduce taxes on your Social Security benefit by controlling something known as your “Reportable Income.” Here to help us understand what that’s all about, and how you can reduce taxes on your Social Security income, is our good friend John Bearss.

Well, the first thing we need to understand about reportable income is “What is it?.” Reportable income is just simply all the ways you make money. For example, reportable income would include such items as wages, salaries, and tips, business income, unemployment compensation, farm income, capital gains, IRA distributions, pension distributions, rental real estate income, royalties, partnerships, S corporations, and trusts. Everything, basically, that is reported on your 1040 Form from line 7 through line 21 is reportable income.

Then you need to add one half of your Social Security benefits. The real culprits that create too much reportable income for most people are found on lines 8a, which is your 1099 interest income, 9a, which is your 1099 dividend income, and the one most people don’t pay attention to or actually understand. It is found on line 8b, which is your tax exempt interest earnings.

Now, most people do understand that with their tax free municipal bonds , that they do not pay taxes on the interest that they have earned. But, what they don’t understand is that you still have to report those interest earnings as reportable income. That is actually why the box is in the middle of the form instead of on the far right side.

So, if the earnings from your tax free municipal bonds increase your reportable income above certain income levels, it may be causing you to pay more income taxes on your Social Security benefit income.

I’ve always heard that you can’t play the game unless you know the rules, so, here are the rules and how it all came about.

Originally, the benefits received by retirees were not taxed as income. But, beginning in tax year 1984 with the Reagan era reforms, single retirees with reportable income over $25,000 and couples who file as married filing jointly with reportable incomes over $32,000 generally saw part of the retiree benefits subject to federal income tax. And, in 1984, the portion of the benefits subject to this tax could be as high as 50%.

Then, the Deficit Reduction Act of 1993 came along. This was ushered in by then President Bill Clinton. This created a whole new tax bracket for Social Security recipients. Now, under this act, single filers with reportable income over $34,000 and married couples filing jointly with reportable incomes over $44,000 could find that 85% of their Social Security benefit income could be taxed.

Here’s an example of a single filer who wanted to increase her income by decreasing taxes on her Social Security benefit income.

When I looked at her 1040 tax form, I noticed that she had a reportable income of $43,218, and that she paid $6,367 in taxes that year. I also noticed that she had reportable income in boxes 8a, 8b, and 9a. So, I suggested that we reposition some of her assets from taxable accounts to tax deferred accounts to help her lower her reportable income.

Now, by making this one adjustment, it lowered her reportable income from $43,218 to $19,364. Since she is now below the $25,000 income threshold, none of her Social Security benefit is taxable. In fact, her total tax went from $6,367 all the way down to $321. This increased her income by $500 a month.
So, to see if this strategy really works for you, let’s take a little test.

Pull out your last year’s 1040 tax form to see if you can lower your income taxes. What you want to do is start out by looking at box 20a. This is the income you receive from Social Security. Then look at box 20b. This is the amount of that income that is subject to taxation. Then, you want to look at box 8a which, again, is your 1099 interest income, box 8b which is your tax free municipal bond earnings, and box 9a which is your 1099 dividend income.

If you have a dollar amount in those boxes, then you actually have the ability to reduce your reportable income, which just might help you reduce your taxes and allow you to keep more of your Social Security benefit income.

So, here are the objectives. If you are a single filer, then try to keep your reportable income under $25,000. If you are married and filing jointly, try to keep your reportable income under $32,000.

But, remember, if you want to lower your reportable income to help you increase your income by reducing your taxes, consider using tax deferred accounts to help you accomplish these goals. Would you like to receive help reducing taxes on your Social Security income? If so, schedule a 100% FREE one-on-one phone consultation with John Bearss to see if this strategy can save you money each year!