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How to avoid social security taxes

how to avoid social security taxes

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First, look at the front side of your tax return from last year. The first part of the form 1040 lists all of the different sources of income that you were taxed on. Look at the line that lists Social Security income. If there is a number (such as $11,491) that is listed on the right side of the form in that row, then you had taxable Social Security income.

Social Security income is only taxable if your modified adjusted gross income is $25,000 or more if you are a single filer or $32,000 or more if you file jointly. Unfortunately, even some forms of tax-free income, such as municipal bond interest, can be used to calculate this income threshold.

If your tax return shows that you are paying taxes as a result of your Social Security income, there may be a remedy available. The formula that determines your Social Security taxability includes all forms of taxable investment income, such as interest, dividends and capital gains. Reallocating some or all of these income items into

tax-deferred or tax-free accounts or vehicles can reduce or eliminate the tax on your Social Security income.

There are several ways to remove taxation on your taxable investment income. One is to move taxable interest-bearing instruments, such as corporate bonds, CDs or preferred stocks, into a tax-deferred vehicle such as a fixed or variable annuity. Another is to sell your taxable investments and buy them back inside a traditional or Roth IRA, although this method can generate current taxable capital gains. Remember that it may not be necessary to sell or reposition all of your taxable investments; you just want to sell or reposition enough to lower your income to where your Social Security benefits are not taxed. The real factor in this equation often comes from taxable interest that is simply reinvested and is not paid out as income. This "unused" interest will not be counted as income if it grows inside an annuity or IRA. For investors who have several hundred thousand dollars in bonds or CDs, a fixed annuity can offer higher rates, tax relief and other benefits.

Category: Taxes

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