Social Security Income Optimization

Social Security benefits are a crucial source of income for many retirees in Wisconsin and across the United States. However, what some may not realize is that these benefits can be subject to taxation at both the federal and state levels. In Wisconsin, understanding the nuances of Social Security income taxation is essential for retirees to effectively plan their finances and minimize tax burdens. In this article, we’ll delve into the specifics of Social Security income taxation in Wisconsin, including who is subject to taxation, how benefits are taxed, and strategies for optimizing tax efficiency.

Who is Subject to Taxation: In Wisconsin, the taxation of Social Security benefits follows federal guidelines. Individuals with combined income above a certain threshold may be subject to taxation on a portion of their Social Security benefits. Combined income is calculated by adding together adjusted gross income, nontaxable interest, and half of Social Security benefits.

How Benefits are Taxed: The taxation of Social Security benefits in Wisconsin mirrors the federal tax treatment. For single filers with combined income between $25,000 and $34,000, up to 50% of Social Security benefits may be subject to taxation. For combined income exceeding $34,000, up to 85% of benefits may be taxable. For married couples filing jointly, the thresholds are $32,000 to $44,000 for the 50% taxation and over $44,000 for the 85% taxation.

Strategies for Optimization: There are several strategies Wisconsin retirees can employ to mitigate the impact of Social Security income taxation:

1. Income Timing: Timing withdrawals from retirement accounts or deferring other sources of income can help keep combined income below the taxation thresholds.
2. Tax-Advantaged Accounts: Utilizing tax-advantaged retirement accounts such as Roth IRAs can provide tax-free income in retirement, reducing reliance on taxable Social Security benefits.
3. Spousal Planning: For married couples, strategically planning withdrawals and coordinating retirement account distributions can help optimize tax efficiency and minimize overall tax liability.
4. State Tax Credits: Wisconsin offers a Homestead Credit and a Property Tax Credit for eligible residents, which can help offset property tax burdens and indirectly alleviate the impact of Social Security income taxation.
5. Consult with Tax and Financial Professionals: Given the complexity of tax laws and individual financial situations, seeking advice from a qualified tax professional and financial consultant is advisable. TJ Collins, Chase & Co. can help provide personalized guidance tailored to your specific circumstances to help you make informed decisions with your Social Security.

Social Security income taxation in Wisconsin requires careful planning and consideration of various factors. By understanding who is subject to taxation, how benefits are taxed, and employing effective tax optimization strategies, retirees can minimize their tax burdens and make the most of their retirement income. Consulting with a knowledgeable tax professional can provide invaluable assistance in crafting a tax-efficient retirement plan tailored to individual needs and goals.

Social Security income benefit reductions due to earned income:

When individuals receive Social Security benefits and continue to work, their benefits may be subject to a reduction if they earn income above certain thresholds. This is known as the Social Security earnings limit, and it applies to beneficiaries who have not yet reached full retirement age (FRA). Here’s how it works:

1. Earnings Limit: The Social Security Administration (SSA) sets an annual earnings limit for beneficiaries who are under full retirement age. For 2024, the earnings limit is $22,320 per year ($1,630 per month).
2. Reduction in Benefits: If a beneficiary earns income above the earnings limit, their Social Security benefits may be reduced. For every $2 earned above the limit, $1 is deducted from their benefits. This reduction applies to all types of Social Security benefits, including retirement, spousal, and survivor benefits.
3. Timing of Reduction: The earnings limit applies only to income earned before reaching full retirement age. Once a beneficiary reaches full retirement age, there is no earnings limit, and they can earn any amount without affecting their Social Security benefits.
4. Adjustment at FRA: If benefits are reduced due to excess earnings before full retirement age, the SSA recalculates the benefit amount once the beneficiary reaches full retirement age. The reduction is spread out over the remaining months of the year until full retirement age is reached, resulting in a higher benefit amount going forward.
5. Special Rules for the Year of FRA: In the year an individual reaches full retirement age, the earnings limit is higher, and a different rule applies. For 2024, the earnings limit in the year of full retirement age is $59,520 and $1 is deducted from benefits for every $3 earned above this limit until the month of full retirement age is reached.
6. Exempt Income: It’s important to note that not all types of income are considered when determining the earnings limit. Certain types of income, such as investment income, pensions, and government benefits, do not count towards the earnings limit.

Understanding how earned income affects Social Security benefits is essential for retirees in Wisconsin who plan to continue working. By being aware of the earnings limit and its implications, beneficiaries can make informed decisions about their employment and retirement timing to maximize their overall income in retirement. Use the SSA provided Social Security earning test calculator to determine how you will be affected by these rules.

In addition to understanding Social Security income taxation, retirees in Wisconsin should also be aware of how Medicare premiums are paid out of Social Security income. Medicare, the federal health insurance program for people who are 65 or older (as well as certain younger individuals with disabilities), consists of several parts, including Part A (hospital insurance), Part B (medical insurance), Part C (Medicare Advantage), and Part D (prescription drug coverage).

Most people do not pay a premium for Medicare Part A if they or their spouse paid Medicare taxes while working. However, Medicare Part B typically requires a monthly premium. The standard Part B premium amount is set by the federal government each year and can vary depending on an individual’s income. For many retirees, these premiums are deducted directly from their Social Security benefits.

Here’s how the process works:

1. Automatic Deduction: If you’re receiving Social Security benefits and enrolled in Medicare, your Part B premiums are usually deducted from your Social Security payments. This automatic deduction streamlines the payment process, ensuring that your premiums are paid on time without the need for separate payments.
2. Premium Adjustment: The standard Part B premium amount is determined annually by the Centers for Medicare & Medicaid Services (CMS). However, individuals with higher incomes may be subject to income-related monthly adjustment amounts (IRMAA), which result in higher premiums. The Social Security Administration (SSA) uses tax return information from two years prior to determine these adjustments.
3. Notification of Premium Amount: Each year, the SSA notifies beneficiaries of their Medicare Part B premium amount for the upcoming year. This information is typically provided in the fall, prior to the start of the new calendar year.
4. Changes in Premium: In some cases, retirees may experience changes in their Part B premiums. This can occur due to changes in income that affect IRMAA adjustments or changes in the standard premium amount set by CMS. It’s essential for beneficiaries to review their annual Medicare notices and stay informed about any changes to their premiums.
5. Options for Payment: While most beneficiaries have their Part B premiums automatically deducted from their Social Security benefits, there are alternative payment options available. For instance, individuals who are not receiving Social Security benefits may receive a quarterly bill for their premiums. Additionally, beneficiaries can choose to have their premiums withheld from other retirement benefits, such as Railroad Retirement Board benefits.

Understanding how Medicare premiums are paid out of Social Security income is crucial for Wisconsin retirees to effectively budget for healthcare costs in retirement. By staying informed about premium amounts, potential adjustments, and payment options, beneficiaries can ensure that their Medicare coverage remains active and that premiums are paid in a timely manner.

Planning for Social Security is crucial in developing a sound retirement plan.  There are many nuances that must be accounted for to optimize the outcome and everyone’s situation is a little different.  To learn more, contact us by visiting TJ Collins, Chase & Co. today or call our office to schedule a consultation regarding your family’s particular situation. Our processes are designed to guide you towards the optimum solution with Social Security.