This is a great question and is usually always asked when I prepare a client's tax return who has some Social Security Income and was taxed on their benefits. There are some important factors I will like to highlight that affects your social security benefits and how IRS tax rules may apply depending on certain factors.
Some factors to consider when you have Social Security Income:
The following quick computation can be done to determine if some of your benefits are taxable:
Step 1. First, add one-half of the total Social Security benefits you received to the total of your other income, including any tax-exempt interest and other exclusions from income.
Step 2. Then, compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.
The base amounts are:
Where taxpayers can defer their "other" income from one year to another, such as by taking Individual Retirement Account (IRA) distributions, they may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to another. However, the required minimum distribution rules for IRAs and other retirement plans have to be taken into account.
Individuals who have substantial IRAs—and who either aren't required to make withdrawals or are making their post age 70.5 required minimum distributions without withdrawing enough to reach the Social Security taxable threshold—may be missing an opportunity for some tax-free withdrawals. Everyone's circumstances are different, however, and what works for one may not work for another.
If you have questions about how these issues affect your specific situation, or if you wish to do some tax planning, please give this office a call 540-693-5881.
Fredericksburg's Tax Expert
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