Do you know how you can reduce, or even eliminate, taxes on your Social Security using an annuity? If you don’t, you’re not alone. In fact, most retirees (and those who are approaching retirement) are not aware that their Social Security benefits could be subject to income tax.
But they can…
Up to 85% of your retirement benefits from Social Security could be taxed at your ordinary income tax rate if you start taking these funds prior to your full retirement age and you also earn income from various other sources.
When are Your Social Security Retirement Benefits Taxable?
Depending on when you opt to start receiving your Social Security retirement benefits, up to 85% of this income may be subject to income tax. There are a couple of factors that come into play, though, in terms of how much – if any – Social Security will be taxed.
The first parameter has to do with when you start receiving these benefits. For instance, if you start receiving Social Security prior to your full retirement age (FRA), there is a chance that you’ll be taxed – depending on whether or not you bring in other income, and if so, how much. The other criteria have to do with how you file your income tax return.
Social Security Full Retirement Age
|Year of Birth||Minimum Retirement Age for Full Benefits|
|1937 or Before||65|
|1938||65 + 2 months|
|1939||65 + 4 months|
|1940||65 + 6 months|
|1941||65 + 8 months|
|1942||65 + 10 months|
|1943 to 1954||66|
|1955||66 + 2 months|
|1956||66 + 4 months|
|1957||66 + 6 months|
|1958||66 + 8 months|
|1959||66 + 10 months|
|1960 or Later||67|
Source: Social Security Administration.
For instance, in 2020, if you file your federal income tax return as an individual, and your combined income is between $25,000 and $34,000, you may have to pay taxes on up to 50% of your Social Security benefit. If you earn more than $34,000, up to 85% of your benefit could be taxable.
If you are married and you file a joint tax return, and you and your spouse have a combined income that is between $32,000 and $44,000, you could owe income tax on up to 50% of your Social Security benefits. And, if you earn more than $44,000, up to 85% of the benefits could be subject to income tax.
What exactly is the “combined income” that these figures are based upon?
To determine that figure, simply take the amount of your adjusted gross income, and add any non-taxable interest that you earn, as well as one-half of your Social Security benefit, and the result is your combined income.
There are actually many types of income that is considered taxable, such as:
- Net self-employment or freelance earnings
- Long-term disability benefits received prior to minimum retirement age
- Union strike benefits
- Jury duty fees
- Rental property income
- Unemployment benefits
- Capital gains (other than the exception for selling your primary residence)
- Severance pay
- Alimony from an ex-spouse
- Interest and dividends from investments
- Royalties and license payments
But for Social Security purposes, pension payments, interest/dividends, and annuity payments are not considered earnings. In this case, even though you may have to pay income taxes on these payments, they are not counted for Social Security taxes.
With that in mind, generating income from an annuity could provide you with more than $44,000 per year. But it won’t impact the taxation of your Social Security benefits. Plus, once you reach your full retirement age, these taxable income figures will no longer apply.
Want to Create a Rock Solid Annuity Income Strategy in Retirement?
If you’d like to create an ongoing income strategy in retirement that seamlessly coordinates with any of the other incoming cash flow you may have, Annuity Gator can help. At Annuity Gator, our mission is to educate consumers on how to plan ahead for the income they need in the future, and to ensure that it won’t run out.
Feel free to reach out to us if you have any questions. You can email us here through our secure online contact form to set up a time to chat. Or, if you’d like to call us directly and talk with an annuity specialist, our toll-free number is (888) 440-2468. We look forward to hearing from you.