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Navigating Higher Taxes on Social Security Benefits in 2021

Social Security Recipients Facing Higher Taxes on Benefits

As the year comes to a close, Social Security recipients are facing the possibility of higher taxes on their benefits. This is due to several factors, including changes to income thresholds and provisional income, the Great Resignation, and delayed Required Minimum Distributions (RMDs).

In this article, we’ll discuss these factors in more detail and offer some strategies for lowering your Social Security tax liability.

Income Thresholds and Provisional Income

Before we dive into the specifics of higher taxes on Social Security benefits, let’s first define a few key terms. The Social Security Administration (SSA) uses a formula to determine the amount of benefits you’re entitled to receive.

Your benefits are based on your “primary insurance amount” (PIA), which is calculated based on your lifetime earnings. The SSA then adjusts your PIA based on when you start receiving benefits and your age when you become entitled to them.

Once your benefit amount is determined, the SSA may reduce your benefits based on your other sources of income. This reduction is known as the “provisional income” formula.

Provisional income is calculated by taking your adjusted gross income (AGI) and adding back in any tax-exempt interest income, as well as 50% of your Social Security benefits. If your provisional income exceeds certain thresholds, your Social Security benefits may be subject to federal income tax.

For 2021, the provisional income thresholds are as follows:

– Single filers: $25,000 – $34,000

– Joint filers: $32,000 – $44,000

If your provisional income is below the lower threshold, your Social Security benefits are not subject to federal income tax. If your provisional income is above the higher threshold, up to 85% of your Social Security benefits may be subject to federal income tax.

The Great Resignation and Delayed RMDs

The Great Resignation is a term used to describe the mass exodus of workers quitting their jobs in search of better opportunities or a change in career. This phenomenon has been growing since the start of the COVID-19 pandemic, and it’s having an impact on Social Security taxes.

When you quit your job or retire, your sources of income may change, which can impact your provisional income. For example, if you retire and begin receiving Social Security benefits and withdrawing money from your retirement accounts, your provisional income may increase, potentially subjecting your Social Security benefits to federal income tax.

Another factor at play is the delay of Required Minimum Distributions (RMDs) for certain retirement accounts. Due to changes made by the CARES Act in 2020, individuals who turned 70.5 or 72 in 2020 and were required to take RMDs from their retirement accounts can delay those distributions until April 1, 2022.

This delay could result in higher provisional income for 2021, potentially subjecting Social Security benefits to federal income tax.

Higher Taxes This Year

The COVID-19 pandemic has had a significant impact on the economy, and the federal government has spent trillions of dollars in relief efforts. As a result, there’s a possibility of higher taxes for many Americans in the coming years, including higher taxes on Social Security benefits.

In addition to the factors we’ve already discussed, there are other changes that could impact your tax liability this year. For example, the IRS has updated the tax brackets for 2021, which could result in higher taxes for some individuals.

There are also changes to deductions and credits that could impact your tax bill.

Strategies for Lowering Social Security Tax Liability

While higher taxes on Social Security benefits may be unavoidable for some individuals, there are strategies you can use to lower your tax liability. Here are a few options:

1.

Planning Ahead: By taking a proactive approach to your retirement income, you can potentially lower your provisional income and reduce your Social Security tax liability. This might involve diversifying your income sources, delaying Social Security benefits, or taking advantage of tax-advantaged retirement accounts.

2. Qualified Charitable Distributions (QCDs): A QCD is a distribution from your Individual Retirement Account (IRA) made directly to a qualified charity.

This distribution can count towards your required minimum distribution and does not count towards your provisional income. This strategy can be especially useful for individuals who don’t need their RMDs for living expenses.

3. Converting Retirement Savings to Roth Accounts: Roth accounts are tax-free in retirement, unlike traditional retirement accounts, which are subject to federal income tax.

If you have significant retirement savings in traditional accounts, it may be worth considering converting some of those funds to a Roth account. This strategy can be complex and requires the help of a financial planner or tax preparer.

Final Thoughts

While higher taxes on Social Security benefits may be a concern, it’s important to remember that these taxes are only a small piece of your overall retirement income plan. By being proactive and taking advantage of tax planning strategies, you can potentially reduce your tax liability and enjoy a more financially secure retirement.

In summary, Social Security recipients may face higher taxes on their benefits this year due to changes in income thresholds, provisional income, the Great Resignation, and delayed Required Minimum Distributions. However, there are strategies for lowering tax liability, such as planning ahead, qualified charitable distributions, and converting retirement savings to Roth accounts.

Proactive measures can help reduce your provisional income and overall tax burden, ensuring a financially secure retirement. By taking action now, you can make the most of your retirement income and minimize the impact of higher taxes on your Social Security benefits.

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