Whether you claimed Social Security at age 62 or waited until age 70, you may have decided to keep working. If that’s the case, it’s important to understand how earned income affects your tax liability and, more importantly, how to minimize the taxes you owe. Here are three ways to potentially minimize the amount you owe.
Manage how much you earn
Keep track of your earned income and check your numbers at least quarterly. If your total Social Security benefits added to your earned income will push you into a higher tax bracket, look for ways to reduce your earned income during the year. For example, you can negotiate your work schedule to stay below the tax threshold or defer bonuses to the following year.
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Make the Most of Tax-Advantaged Retirement Accounts
Contribute as much as possible to a 401(k) or IRA to reduce your adjusted gross income (AGI). And since you are over 50 years old, take advantage of the updating contributions. If you work for a company with a high-deductible health plan, establish a health savings account (HSA). Contributions to an HSA reduce your AGI, distributions for qualified medical expenses are not taxable, and HSAs do not affect taxes on Social Security benefits.
Suspend benefits
One way to minimize taxes is to determine if you can live without Social Security right now. If so, the Social Security Administration (SSA) allows you to suspend benefits…for now. Here’s a thumbnail look at the suspension of benefits:
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You can stop benefits as long as less than 12 months have passed since you became eligible to claim benefits.
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If you stop benefits, you will have to return all the money you have received up to that point. This is called “full withdrawal.”
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If you have reached full retirement age (67 for most Americans), you can earn delayed retirement credits during the months you are not receiving benefits.
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If you voluntarily stop benefits, the benefits of any member of your household who receives Social Security based on their work history (such as a spouse receiving spousal benefits) will also be stopped. The divorced spouse may continue to receive benefits.
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You will have to find another way to pay your Medicare premiums, since they cannot be deducted from suspended benefits.
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Your payments will automatically restart at age 70 (or you can restart them sooner). However, since you earned delayed retirement credits, your monthly payment will be higher than when you first applied for suspension.