Thanks to the stimulus bill, taxes on retirement income and social security could be reduced

Taxes in retirement can dramatically reduce the money you have. If you have a Traditional or 401 (k) IRA, you will generally be taxed on withdrawals as regular income. And if your book income exceeds a certain threshold, you could even find yourself subject to tax on up to 85% of your Social Security benefits.

The good news is that you may have an unprecedented opportunity in 2020 to reduce the amount you owe the IRS. This comes thanks to the CARES (Coronavirus Aid, Relief, and Economic Security) law, although not everyone can take advantage of it.

How the CARES law allows you to reduce your social security taxes in 2020

The CARES Act could help you reduce or avoid taxes on Social Security benefits for one simple reason: It waives the requirement to withdraw Minimum Required Distributions (RMDs) from your traditional 401 (k) or IRA accounts this time. year.

Normally, RMDs are required once you turn 72 (or 70 1/2). The IRS life expectancy tables dictate how much you need to withdraw each year and you are subject to a penalty of 50% of your RMD amount if you don’t take it. And, for many people, these RMDs give them enough income to make their social security benefits at least partially taxable.

This is because the Social Security administration determines how much you owe in taxes on your retirement benefits based on “book income” and which is set to include half of your Social Security check as well as all taxable income. , including retirement account distributions.

Once your book income reaches $ 32,000 if you are married and file a joint return, or $ 25,000 for other tax return statuses, you will have to pay taxes on at least part of your benefits. More precisely:

• Married spousal filers with income between $ 32,000 and $ 44,000 owe taxes on up to 50% of benefits. With incomes over $ 44,000, a married couple can be taxed up to 85% of benefits.
• Other tax filers with income between $ 25,000 and $ 34,000 could be taxed on up to half of the benefits and those with income over $ 34,000 could see up to 85% of their benefits subject to tax. tax.

If you are making withdrawals from tax-advantaged accounts in order to meet your RMD requirements and the money you withdraw puts your accounting income above those limits, there is normally nothing you can do about it – you just have to pay the tax invoice due. otherwise, you will have to pay penalties for not taking your required distributions.

But this year, since the CARES Act waives the RMD requirement, you can choose to withdraw a smaller amount of money from your retirement accounts. With less accountable income, you could avoid going above the threshold at which your benefits become taxable, saving you a big IRS bill.

Of course, if you don’t take RMD this year, you will also save on the taxes you normally owe on your distribution, which is taxed as ordinary income. So the savings would not only come from avoiding Social Security taxes, but also not owing that money to the IRS either.

Should you skip your RMD to reduce your tax bill?

If you need to withdraw money from your tax-advantaged retirement accounts to fund your living expenses, having RMDs suspended for this year may not help you much – after all, you will do everything. way of withdrawals.

But if you have other sources of funding or if you can live on less and don’t need to withdraw money, the CARES Act has provided an unprecedented opportunity to avoid a substantial amount of taxes. this year and keep more of your social security checks.

This will probably be your only chance to avoid RMDS without having to pay the usual 50% penalty, so if you can make it work for a year, it may be worth it.