Social Security 2023: 5 Tax Breaks Social Security Recipients Qualify For But May Not Know About
Income taxes don’t go away just because you started collecting Social Security retirement benefits. You still might get stuck with a federal income tax bill on your benefits if you earn certain types of taxable income outside of Social Security payments.
Taxable income for Social Security recipients includes wages, self-employment earnings, interest and dividends, according to the Social Security Administration. The good news is, the IRS only taxes you on either 50% or 85% of your Social Security benefits, depending on your income.
You can learn more about the various factors that determine Social Security income taxes — including combined income thresholds and how much you might have to pay – by visiting the SSA’s “Income Taxes And Your Social Security Benefit” page.
If you do have to pay income taxes as a Social Security recipient, there are a number of tax breaks you might not know about that can lower your tax bill. Here’s a look at five of them.
Tax-Deductible Contributions to Retirement Accounts
If you are still making contributions to an IRA, these can be fully or partially tax-deductible to lower your adjusted gross income (IGA), according to the AARP. Social Security recipients can stash up to $7,500 in pre-tax dollars in an IRA in 2023, up from $7,000 last year. Contributions to a health savings account (HSA) might also be tax-deductible and reduce your taxable income.
Business and Hobby Deductions
If you started a business or took up an income-producing hobby in retirement, such as crafts or woodworking, you’ll have to pay self-employment income tax if your earnings reach a certain level. But you can deduct some of the costs of your enterprise — and might also have additional deductions if you are 65, according to a blog on The Arbor Company website. Deductions apply to all kinds of business expenses, including advertising, supplies, home office costs, consultant fees and business education expenses.
Required Minimum Distribution Donations
RMDs are retirement account withdrawals you must take when you reach a certain age. They’re typically made at the end of the year. If you’ve reached the age where you have to take RMDs, you can avoid having the proceeds count as taxable income by donating the money to charity by Dec. 31 of each tax year.
“This is a good strategy for somebody who is forced to take money out of an IRA that they don’t need,” Tim Steffen, director of advanced planning for wealth management firm Baird, told the AARP.
One thing to remember: The RMD donation from a traditional IRA or 401(k) must be transferred directly from your account to the charity.
Elderly or Disabled Tax Credit
Tax credits for the elderly or the disabled let you reduce the federal income tax you owe, according to the IRS. To get the credit, you must be either 65 or older or meet other eligibility standards such as being retired or on permanent or total disability. You might also qualify if your AGI or the total of nontaxable Social Security, pensions annuities or disability income fall below certain limits. The credit itself ranges between $3,750 and $7,500.
Use Losses To Offset Gains
Nobody actually likes losing money on the stock market, but sometimes you can use losses to your advantage when it comes to taxes. As the AARP noted, if you sell losing stocks, you can use those losses to offset income earned on capital gains and potentially write off up to $3,000 in ordinary income. This strategy is also known as tax-loss harvesting.
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