As Social Security recipients, it's important to recognize that income taxes don't fade away once you start receiving retirement benefits. If you earn specific types of taxable income beyond Social Security payments, you could find yourself facing a federal income tax bill on your benefits. The silver lining is that the IRS only subjects 50% or 85% of your Social Security benefits to taxation, contingent on your income level.
Understanding the nuances of Social Security income taxes, such as combined income thresholds and potential tax liabilities, is crucial. To delve deeper into this, consider visiting the Social Security Administration's dedicated page on "Income Taxes And Your Social Security Benefit."
In instances where income taxes are applicable for Social Security recipients, there are a handful of lesser-known tax breaks that have the potential to significantly lower your tax burden. Here, we shed light on five of these valuable tax breaks:
Deductible Contributions to Retirement Accounts:
For those who are actively contributing to an IRA, it's worth noting that these contributions can be partially or fully tax-deductible. By doing so, you effectively lower your adjusted gross income (AGI). In 2023, Social Security beneficiaries can allocate up to $7,500 in pre-tax funds to their IRA, a step up from the previous year's limit of $7,000. Moreover, contributions made to a health savings account (HSA) could also yield tax deductions, thereby reducing your overall taxable income.
Business and Hobby Expense Deductions:
Perhaps you've ventured into starting a business or pursued an income-generating hobby post-retirement, such as crafting or woodworking. In such scenarios, where your earnings reach a certain threshold, you may be liable to pay self-employment income tax. However, the silver lining is that you can offset a portion of your enterprise costs through deductions. Additionally, individuals aged 65 and above might qualify for supplementary deductions. These deductions encompass a wide spectrum of business-related expenses, including advertising, supplies, home office expenditures, consultant fees, and business education costs.
Leveraging Required Minimum Distribution (RMD) Donations:
As you reach the age necessitating mandatory RMDs from your retirement accounts, a strategic move can help you sidestep the resulting taxable income. By directing your RMD amount to charitable donations before December 31st of each tax year, you effectively prevent the proceeds from being considered taxable income. However, it's vital that the RMD donation from your traditional IRA or 401(k) is directly transferred to the charitable organization.
Elderly or Disabled Tax Credit:
For those in the elderly or disabled bracket, the IRS extends tax credits that enable you to reduce your federal income tax liability. Qualification hinges on being either 65 years or older or meeting specific disability criteria. Other avenues for eligibility include retirement status or being on permanent or total disability. Additionally, if your AGI or the cumulative total of nontaxable Social Security, pension annuities, or disability income falls below specific thresholds, you stand to benefit. The quantum of the credit ranges between $3,750 and $7,500.
Capitalizing on Losses to Offset Gains:
While incurring losses on the stock market isn't desirable, such situations can be advantageous when it comes to taxes. Capitalizing on losses can be leveraged to your benefit by offsetting them against capital gains, potentially enabling you to write off up to $3,000 in ordinary income. This tax-efficient strategy, often referred to as tax-loss harvesting, can yield substantial benefits.
Conclusion:
As tax regulations are subject to change, it's advisable to seek guidance from tax professionals or financial advisors to ensure you optimize these tax breaks in accordance with your unique circumstances. By capitalizing on these often-overlooked tax breaks, Social Security recipients can potentially alleviate their tax burden and make the most of their retirement income.