Planning for taxes on Social Security
Recently, we've been hearing from people who have been enrolled in Social Security, seeing their taxes go up, and not understanding why. There are ways to keep more of your retirement income, but first, let’s look at how it can be taxed.
We know that Social Security benefits aren’t tax-free. In fact, up to 85% of the benefits you receive each year could be subject to tax, depending on your household income. Moreover, 100% of your withdrawals from traditional IRAs and traditional 401(k)s will likely be considered taxable income.
When making these withdrawals, we work closely with our clients to ensure they’re taking what they need but not enough to push them into the next tax bracket. We’ve recently encountered individuals who took advantage of high interest rates by putting their money in CDs or money market accounts. The interest on these is taxed at the same federal income tax rate as the money you receive from paid work, which is why people are seeing their income tax rates jump into the next bracket. That's why it's crucial to collaborate with a tax professional to develop a strategy to mitigate that sudden increase, just like we would with IRAs or 401(k)s.
Furthermore, the Tax Cuts and Jobs Act of 2017 is set to sunset on Jan 1, 2026, which could exacerbate the problem further. When the Tax Cuts and Jobs Act of 2017 ends, this means tax rates will revert to their previous higher levels. The act doubled the standard deduction and without legislation, that could lead to a $12,000 deduction lost. It also doubled the Child tax credit – without legislation, this is a $1,000 deduction lost. The act also doubled the estate and gift tax exclusion – without legislation, it will be cut in half - $24 MM to $12 MM. Mortgage interest deduction will be restored to $1M in debt before phaseout and home equity interest deduction will be allowable to $100,000
With talk of the Fed possibly lowering interest rates again and the Tax Cuts and Jobs Act sunsetting, there are a lot of variables coming down the pipeline that could affect your tax bracket for the next year, and you want to start preparing for those today.
Even though it feels like we just got out of tax season, it’s never too soon to start prepping for the next season. When it comes to interest rates, the clock is ticking, and if you wait until they lower, you’ll miss your opportunity. At Lineweaver Financial Group, we take a holistic approach when it comes to your finances so our experienced professionals can coordinate your tax, retirement, and wealth management plan. Call us today for a no-cost, no-obligation meeting to help prepare you for future changes.
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