Levying & Taxing Social Security Retirement Benefits

Levying & Taxing Social Security Retirement Benefits

Taxes impacting your Social Security retirement benefits come in different forms, including IRS levies on Social Security benefits and taxation on earned income and investments. The latter is more common for our clients.

In this post, we talk about both.

It’s likely you won’t face a tax levy on your Social Security benefits. However, someone you care about may and it helps to be informed.

Let’s start with levying, followed by how you can avoid paying taxes on Social Security retirement benefits.

Can the IRS Put a Tax Levy on My Social Security Benefits?

Yes, your Social Security benefits can be garnished. There are two common causes:

Unpaid Federal Taxes

The Federal Payment Levy Program (FPLP) allows the IRS to tax up to 15% of your Social Security income to cover delinquent tax debt. Lump sum death benefits and benefits paid to children are not included in the FPLP, nor are Supplemental Security Income (SSI) benefits.

Unpaid Child Support and Alimony

Social Security benefits can be garnished for child support and alimony. And you can’t appeal the Social Security Administration’s decision to implement garnishment orders. If you disagree and want to fight it, you’ll need to contact the court that issued the order.

Tip: If optimizing Social Security income is important to you, read our popular post: Can I Retire on $500K Plus Social Security (or $700K, $2 million, etc.)?

How Can I Avoid Paying Taxes on Social Security?

It’s likely you can’t avoid paying taxes on Social Security. We discuss two key tax reduction strategies below.

Tip: Understand How Income Affects Social Security Benefits and find Answers to Popular Social Security Questions.

The good news is you may be eligible to pay taxes at a reduced rate.

If your total income is between $25,000 and $34,000 (or $32,000 to $44,000 for a married couple filing jointly), then up to 50% of the benefits you receive from Social Security are taxable. Bring in more than $34,000, and up to 85% of your benefits may be taxable. If your total income falls below these levels, you do not pay taxes on your Social Security income.

These thresholds apply to federal taxes only.

Keep in mind, you may pay more in taxes if you live in one of 12 states that tax Social Security retirement benefits. Also, each state has its own tax rules, including specific deductions and exemptions.

Which States Tax Social Security Benefits?

New Mexico
West Virginia
Rhode Island

Whether you earn money through a part-time job, rental property, interest on investments or other avenues, all income must be reported on your federal taxes, potentially increasing your Social Security retirement benefits tax obligation.

Strategies to Minimize Taxes on Social Security Retirement Benefits

Depending on your income-generating assets, in any given tax year you may swing between tax brackets. Yet, there are proactive steps you can take to keep yourself in a lower bracket, ultimately retaining more of your benefits.

Here are two key strategies:

Take Withdrawals From Roth Accounts

If your required minimum distributions (RMDs) could cast you into a higher tax bracket, take the minimum required amounts from your traditional IRA and 401(k) accounts, then withdraw any surplus from your Roth IRA or Roth 401(k) accounts, since you’ve already prepaid taxes on this income.

To avoid taking RMDs from your traditional IRA account, qualified charitable distributions (QCDs) allow you to reduce your tax bill by directing some or all of that cash to a charity. For more information, read our post on Smart Charitable Giving Strategies.

If you don’t have a Roth account, then it may be beneficial to convert some of your traditional retirement accounts to a Roth IRA. Our complimentary guide explains how and why: Converting to a Roth IRA: One of the Smartest Tax Moves You Can Make.

Tax-Loss Harvesting

Let’s say you bought stock for $3,000 and its value dropped to $2,000 in the year you purchased it. You could sell the stock and use the $1,000 loss to offset your investment gains, reducing your taxable income. This strategy is known as tax-loss harvesting.

Tip: To keep abreast of tax optimization strategies, bookmark our exclusive suite of tax material.

Next Steps

Many investors pay more taxes than they need to during retirement.

The workaround is having a retirement income plan—one that accounts for all forms of income and the best ways to withdraw your money. This way, you minimize taxes and keep more of your Social Security retirement benefits in your pocket.

Our financial planners regularly use financial modeling strategies to help clients minimize their retirement tax obligations. If you want your Social Security benefits to last longer during your retirement, contact Adviser Investments anytime for assistance. We pride ourselves on being The Planner You Can Talk To.

Related Special Report

Social Security’s Role in Your Retirement

Tax and legal information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice.  Personalized tax advice and tax return preparation is available through a separate, written engagement agreement with Adviser Investments Tax Solutions. We do not provide legal advice. Always consult a licensed attorney or tax professional regarding your specific legal or tax situation.

Our statements and opinions are subject to change without notice.  All investments carry risk of loss and there is no guarantee that investment objectives will be achieved.

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