Retirement taxes can take a big bite out of the money you have available. If you have a traditional IRA like 401 (k), you will typically be taxed on deductions as ordinary income. And if your countable income is a certain threshold more, you might even find that you are taxed at a maximum of 85% of your Social Security benefits.
The good news is, you may have an unusual opportunity in 2020 to reduce the amount you owe the IRS. This comes with courtesy of the Coronavirus Aid, Relief, and Economic Security (CARES) Act, although not everyone can benefit from it.
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How the CARES Act could reduce your Social Security taxes in 2020
The CARES Act could help you reduce or avoid taxes on Social Security benefits for one simple reason: It waits for the requirement that you take minimum distributions (RMDs) from your 401 (k) this year as traditional IRAs. accounts.
Normally RMDs are required once you reach 72 (or 70 1/2). Life expectancy tables of the IRS dictate the amount you have to withdraw each year and you are subject to a fine of 50% of the amount of your RMD if you do not take it. And, for many people, these RMDs provide them with enough income to make their Social Security benefits at least partially taxable.
This is because the Social Security Administration determines how much you owe in taxes on your pension benefits based on “countable income” and that is defined to include half of your control for Social Security, as well as all taxable income, including distributions for pension accounts.
Once your countable income hits $ 32,000 if you are married and filing jointly, or $ 25,000 for other tax filing statuses, your taxes will have at least a portion of your benefits. Specifically:
- Married common filers who have incomes between $ 32,000 and $ 44,000 are tax liable up to 50% of benefits. With income above $ 44,000, a married couple can be taxed on up to 85% of benefits.
- Other tax services with incomes between $ 25,000 and $ 34,000 could be taxed on up to half of benefits and those with incomes above $ 34,000 could see up to 85% of their benefits subject to tax
If you make withdrawals from tax-deductible accounts to meet your RMD requirements and the money you take places your countable income above these limits, then there is usually nothing you can do – you just need the tax bills pay because otherwise you will be fined for not taking your required distributions.
But this year, since the CARES Act deviates from the RMD requirement, you can choose to withdraw a smaller amount of money from your pension accounts. With less calculated income, you could avoid going above the threshold where your benefits are taxed, thus saving you from a large IRS account.
Of course, if you did not take out RMD this year, you would also be saving on the taxes you would normally have to pay on your distribution, which would be taxed as ordinary income. That the savings would come not only by avoiding social security taxes, but also by not earning this money from the IRS either.
Do you need to skip your RMDs to keep your tax bills low?
If you have to take money out of your tax-deductible pension accounts to finance your living expenses, then the fact that RMDs have been stopped for this year may not help you much – after all, you will retire anyway.
But if you have other sources of funds or can live on less and you do not need to take money back, the CARES Act has provided an unusual opportunity to avoid a substantial amount of taxes this year and keep more of your social security controls .
This will probably be your only chance to avoid RMDS without incurring the usual 50% penalty, so if you can work it out for a year, it may be worth doing.
