In 2018, about 63 million Americans will receive approximately $1 trillion in Social Security benefits. Maximizing your take of these benefits boosts your spending money. But doing it wisely also helps reduce the amount of taxes you pay.
Whether you’re approaching retirement age or have already started taking benefits, there are hacks you should learn to maximize your share of Social Security.
Keep reading to learn about nine Social Security hacks you need to know.
Defer Benefits to Increase the Monthly Benefit Amount
Although it might be tempting to take Social Security benefits as soon as possible, carefully consider your options. The longer you wait before applying for benefits — at least up to age 70 — the larger your monthly benefit will be.
Depending on when you were born, taking retirement benefits at age 62 results in a 20 percent to 30 percent reduction in your monthly benefit versus waiting until your full retirement age to start benefits. Worse, if you’re claiming early under a spouse’s work record, your benefit decreases by 25 percent to 35 percent.
You can wait even past your full retirement age to further increase your monthly benefit amount. Each year you wait up until the year you turn 70, your benefit will increase between 5.5 percent and 8 percent per year. If you wait longer than 65, make sure you still sign up for Medicare when you turn 65.
If you are in poor health and do not expect to live long, waiting a few years for a higher benefit that might never be paid likely won’t make sense for you. For example, waiting will backfire if you wait three extra years so that your benefit is larger, but you only live for a year to receive and enjoy the higher benefit amount. In such circumstances, you would have received a larger benefit overall if you had started claiming as soon as possible.
Use Your Spousal Benefit
If you’re married, make sure to compare the benefit under your own work record to the benefit you can receive under your spouse’s work record. For example, if you stayed at home with your kids, you might not have paid as much in Social Security taxes as a spouse who spent more years in the workforce.
As a result, you might be entitled to a higher benefit on the spouse’s record. The Social Security Administration will pay out your own benefit first, and then will pay out an additional amount until you reach the spouse’s higher benefit level.
If you were born before Jan. 1, 1954, you can opt to claim a restricted benefit under your spouse’s record once you reach full retirement, and then wait until 70 to claim full benefits under your own record. Such a move allows your benefits to increase in the interim. SSA rules have closed this loophole for anyone not born before this date.
What If You’re Divorced?
Even if you’re divorced, you might not be out of luck. You can still qualify for Social Security benefits under your ex-spouse’s work record if you were married for at least 10 years, you are 62 or older and you are not married to someone else at the time you apply for benefits. In addition, the benefit you receive for your own work has to be lower than the benefit you would receive based on your ex-spouse’s working history.
If your former spouse hasn’t started claiming benefits, you can still claim them if you have been divorced for at least two years and your spouse is eligible to receive them. In addition, your former spouse cannot oppose you claiming under his or her work record. Your claim does not affect how much your former spouse receives.
Avoid Claiming Early If You’re Still Working
If you have reached early retirement age — but not full retirement age — you should generally avoid claiming benefits if you are still working. Taking benefits too early does not maximize your Social Security income. Instead, it can result in you receiving reduced Social Security benefits.
Full retirement age varies depending on when you were born. If you were born prior to 1938, your full retirement age is 65. But, it increases gradually each year after that until you reach a full retirement age of 67 if you were born in 1960 or later.
If you claim benefits before your full retirement age, your earnings will reduce the amount of your Social Security benefits by $1 for every $2 you earn over the limit, which is $17,040 in 2018. For example, if you have $20,920 in earned income, your benefit would be reduced by almost $2,000.
Instead, Wait Until You Reach Retirement Age
In the year you reach minimum retirement age, the penalty is a little less severe: Your benefits are reduced by $1 for every $3 you are over the limit, which is $45,360 for 2018. Earnings count before the month you reach full retirement age.
If you’ve already reached full retirement age, work away. At that point, your earnings won’t reduce your benefits. However, the higher your income, the larger the portion of your Social Security benefits that will be included in your taxable income.
Convert to Roth Retirement Accounts Before Taking Benefits
To determine the portion of Social Security benefits subject to income taxes, add up your adjusted gross income, nontaxable interest and one-half of your Social Security benefits. This number is your combined income. The higher your combined income, the larger the portion of your Social Security benefits that is taxed.
For example, in 2018, if you’re single, you pay tax on up to half of your Social Security benefits if your combined income falls between $25,000 and $34,000. If your combined income exceeds $34,000, you might pay taxes on up to 85 percent of your benefits. For married couples filing jointly, you pay tax on half of your benefits if your combined income falls between $32,000 and $44,000, and tax on up to 85 percent of your benefits if your income exceeds $44,000.
If you convert your retirement accounts to Roth accounts before retirement, you will trigger taxes on the conversion. For example, if you convert $50,000 from a traditional IRA to a Roth IRA, you will pay taxes on that $50,000 in the year of the conversion. But, since you aren’t taking Social Security benefits yet, you won’t have to worry about the extra income reducing your benefits.
Once you’ve started receiving Social Security benefits, consider taking distributions from an after-tax retirement plan rather than a taxable account. That way, your adjusted gross income will be lower, which can reduce the portion of your Social Security benefits subject to income taxes.
Of course, you might have other financial considerations that make this a bad idea for your circumstances. If you’re unsure, find a good financial advisor or tax professional who can steer you in the right direction.
Use Qualified Charitable Distributions for Required Minimum Distributions
If you’re planning to give money to charity while you’re receiving Social Security benefits, using a qualified charitable distribution (QCD) can reduce the income taxes on your benefits. A QCD allows you to donate your required minimum distribution from your IRA directly to a charity so it doesn’t get reported as taxable income.
To perform a QCD, request that the financial institution holding your IRA pay the money directly to a qualifying charity. QCDs are limited to $100,000 per person, per year. So if you’re married filing jointly, you can each apply $100,000 of required distributions to QCDs. Because the distribution isn’t included in your taxable income, you can’t report it as a charitable deduction.
If you exclude your IRA distribution from taxable income, you can reduce the portion of Social Security benefits subject to income taxes. By contrast, if you take the distribution and then make a charitable contribution, your combined income will be increased by the amount of the distribution.
Relocate to a State That Doesn’t Tax Benefits
If you’re adamant about reducing the taxes you pay on Social Security benefits, changing where you live might be an option. According to Kiplinger, as of February 2018, 13 states impose income taxes on Social Security benefits:
- New Mexico
- North Dakota
- Rhode Island
- West Virginia
What to Consider Before You Decide to Move
Don’t automatically abandon these states. Some of them have exemptions that can reduce or eliminate the tax on your benefits. For example, if you’re married in Missouri, you won’t pay taxes on your benefits if your adjusted gross income is up to $100,000, according to the Motley Fool. If you’re single, you don’t pay benefits if your adjusted gross income is up to $85,000.
However, Minnesota, North Dakota, Vermont and West Virginia have no tax breaks for Social Security benefits. So, if you live in one of those states, you will pay taxes on Social Security benefits at the same rates you pay taxes on them for your federal return.
In addition, don’t make your decision solely on state income tax consequences for your Social Security benefits. Some states that tax these benefits are still tax-friendly overall. Saving a few dollars on taxes probably isn’t worth leaving your family and friends for somewhere you don’t really want to live. But, if you’ve been planning to retire to Florida and you’ve been living in Minnesota, you can add the tax break as one more reason to make the move.
Click through to learn about places where you can live on just social security.