Taxation of Social Security benefits has been in the news lately, with the passage of a temporary tax deduction as part of the One, Big, Beautiful Bill Act. The bill includes a deduction of $6,000 for individuals ($12,000 for couples) over 65, and is intended to reduce taxation on Social Security benefits. However, many will still be taxed on their benefits once they begin collecting.
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Fidelity offered advice on saving on your Social Security taxes. Here’s what you need to know.
Up to 85% of Social Security benefits can be taxed, depending on your household income, according to Fidelity. If your income is more than $34,000 for an individual or $44,000 for a couple, up to 85% of your benefits are taxable. If your income is between $25,000 and $34,000 for an individual or between $32,000 and $44,000 for a couple, up to 50% of your benefits are taxable. If your income is less than $25,000 for an individual or $34,000 for a couple, your benefits will not be taxed.
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In addition to taxation on your Social Security benefits, it’s important to remember that distributions (withdrawals) from traditional (not Roth) IRA and 401(k) accounts are taxable as regular income. So, when you calculate your income to determine your tax bracket, be sure to include those amounts, as well.
Dividends or gains from the sale of stock that you have held for a year or longer are taxed at 15% or 20%, depending on your filing status and income.
Distributions from Roth IRAs or 401(k)s and health savings accounts (HSAs) are not taxed. These accounts are funded with after-tax money, so you don’t pay taxes on withdrawals. This money is also not taken into account when determining whether your Social Security income will be taxed.
There are a couple of tactics you can use to help pay less in taxes on your Social Security retirement benefits. Even if you’re not collecting Social Security yet, knowing these tips can help you in the future.
If you are still saving for retirement, contribute to a Roth IRA or 401(k) if you can, either instead of or in addition to your traditional retirement contributions. There are income limitations for Roth contributions, but if your income exceeds those, you may still be able to reap some benefit. You can convert your traditional IRA or 401(k) savings to a Roth. You’ll have to pay taxes on the money you convert now, but you won’t pay taxes on that money when you withdraw it. And that can reduce the amount of income you have, which informs the calculation of how much of your Social Security benefit is taxed.