How To Save Taxes On Social Security Benefits

Some retirees are surprised when they learn their Social Security retirement benefits can be taxed. However, there are steps you can take before and during retirement to lessen the potential tax burden. Learn how these benefits are taxed and the moves you can make to minimize what you have to pay. 

How Social Security Benefits Are Taxed

Not all Social Security benefits are taxed. If your overall income is low enough, it’s possible that none of your Social Security benefits will be subject to taxation. Just 40% of those receiving the benefits need to pay taxes, according to the Social Security Administration. Note, though, that some states also levy their taxes on Social Security benefits. 

To determine if your benefits can be taxed, the IRS totals your adjusted gross income, nontaxable interest, and half of your Social Security benefits to arrive at a combined income figure. Depending on that figure, this is how you’ll be taxed:

• Single filers with combined income less than $25,000 and married couples with combined income less than $32,000 won’t have their benefits subject to taxation.
• Single filers reporting a combined income between $25,000 and $34,000 and married couples between $32,000 and $44,000 will have 50% of their Social Security benefit subject to taxation.
• A single filer with more than $34,000 in combined income, or couples above $44,000 will have 85% of their Social Security income subject to taxation. Note that regardless of how big your retirement income is, no more than 85% of your Social Security will ever be subject to taxes. 

Reducing Taxes Paid On Social Security Benefits

There are ways to help lower how much of your Social Security benefit is subject to benefits. Are you nearing retirement or already retired? Consider withdrawing money from an IRA for retirement expenses before you tap Social Security. That will lessen how much of your IRA funds will be part of your combined income. Also, you may be able to delay taking Social Security benefits, which can increase how much in those benefits you receive throughout your retirement.  

If you’re still working, consider converting any traditional IRAs you hold to Roth IRAs. Though you will owe taxes today on the money you hold in the traditional account, you can eventually withdraw those funds from the Roth account tax-free in retirement, helping to lower the combined income figure the IRS takes into account.

If you’re already retired and need to take the required minimum distributions from an IRA, consider donating the money to charity to reduce your overall combined income. Note that this option may not be practical if you need the IRA funds to live off of in retirement. 

Jim Peters - CFP