Social security was once completely free of tax. But those days are long gone and now normal tax rules apply. If you don’t tread carefully, you can easily find yourself in a situation in which you are paying more tax than necessary because you have fallen into a social security tax trap.
If you earn above $25,000, your social security benefits become taxable. This rate is a tad higher for married couples, but it’s still under $30,000. The tax trap here is that even benefits which are normally tax exempt can be targeted by the IRS.
Once you get over 70.5 years of age, you have to take a minimum amount from your retirement accounts every year. You can’t avoid this, but you can make sure to take these into account before voluntarily taking anything else.
This will help you to keep your tax bill down.
Assuming You Have Social Security
Railroad and government workers are two distinct groups. What they have in common is they aren’t covered by social security. If you fail to look for an alternative, you could fall into the social security tax trap of not having any social security at all.
That means you can’t take advantage of any of the tax benefits when you eventually retire.
The best way to avoid the social security tax trap is to simply be aware of what is going on in the first place. Read the small print to ensure you don’t accidentally withdraw too much and become eligible for tax.
Image credit: Lending Memo