24 Feb Can I avoid taxes on Social Security and IRA income?

Q. My main source of income is Social Security. I am 70 ½. How much should my IRA distribution be so that I don’t pay taxes?
— Retired

A. We wish it was a simple scenario, but when it comes to taxes, things are rarely simple.

We’re going to assume you’re single.

The general rule is that you start to owe taxes once your income exceeds the standard deduction, said Gail Rosen, a Martinsville-based certified public accountant.

She said in 2020, the standard deduction for a single taxpayer is $12,400 but if you’re over 65, it’s $14,050.

“In 2020, single filers with a combined income from $25,000 to $40,000 pay income taxes on up to 50 percent of their Social Security benefits,” Rosen said. “Therefore, you can make more than the standard deduction and avoid tax.”

She offered this example: If your pension or IRA income is $14,000 and your Social Security benefits are $20,000, that totals $34,000 and there would be no tax. This is because 50 percent of your Social Security benefits are $10,000 — under the formula stated above. If you add $10,000 of Social Security benefits to $14,000 of pension or IRA income, that equals $24,000, which is less than the $25,000 threshold to pay tax on your Social Security benefits, she said.

Also note that the tax law recently changed, increasing the Required Minimum Distribution (RMD) age from age 70 ½ to age 72 for anyone born on or after July 1, 1949.

“Since you are a single taxpayer over age 62 and you have less than $100,000 of gross income, in year 2020 you can exclude up to $75,000 of your pension income for New Jersey income tax purposes,” Rosen said.

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This story was originally published on Feb. 24, 2020.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.