When Are Social Security Benefits Taxable & How To Reduce Them: Know Details

Social Security benefits are often a critical part of retirement income, but many retirees are surprised to learn that their Social Security payments can be taxable, depending on their income.

Although it’s difficult to entirely avoid taxes on Social Security, there are several strategies to minimize the taxes you owe and ensure you retain more of your benefits.

When Are Social Security Benefits Taxable?

Whether your Social Security benefits are taxable depends on your combined income—a figure calculated by adding your adjusted gross income (AGI), any nontaxable interest, and half of your Social Security benefits.

Here’s how the taxation works:

• Single filers:
  • If your combined income is between $25,000 and $34,000, up to 50% of your Social Security benefits may be taxable.
  • If your combined income is above $34,000, up to 85% of your benefits may be taxable.
• Married couples filing jointly:
  • If your combined income is between $32,000 and $44,000, up to 50% of your benefits may be taxable.
  • If your combined income is above $44,000, up to 85% of your benefits may be taxable.

As these income thresholds have remained unchanged since 1983, an increasing number of people now fall into the category of having taxable Social Security benefits.

Estimates suggest that more than 40% of Social Security recipients pay taxes on their benefits, a figure expected to rise in the future.

Strategies to Reduce Taxes on Social Security

While it’s nearly impossible to avoid Social Security taxes altogether if your income exceeds the thresholds, there are several ways to minimize how much you owe.

1. Delay Taking Social Security

Delaying Social Security benefits until age 70 not only increases your monthly benefit by 8% per year after full retirement age but also helps you avoid taxes for the years you’re not receiving benefits.

If you can live off other income sources until 70, this strategy provides both tax deferral and higher payments in the future.

2. Manage Income from Other Sources

Since your adjusted gross income (AGI) impacts the taxation of Social Security, consider carefully managing income from other sources, such as work or investments, during retirement:

• Stop working: Even part-time work can push your combined income over the threshold, so if possible, consider retiring fully or scaling back work.
• Minimize withdrawals from taxable accounts: Reducing withdrawals from traditional retirement accounts like 401(k)s and IRAs can lower your AGI. Instead, withdraw from Roth IRAs, as Roth distributions are tax-free and don’t count toward combined income.

3. Roth Conversions

If you have funds in traditional IRAs or 401(k)s, consider converting some of that money into a Roth IRA before you start claiming Social Security.

While you’ll owe taxes on the converted amount, Roth IRAs grow tax-free, and withdrawals won’t count as income when calculating your combined income. This strategy is most effective if you convert funds before starting Social Security benefits.

4. Donate RMDs to Charity

Once you turn 73, you must begin taking required minimum distributions (RMDs) from traditional retirement accounts. These withdrawals increase your AGI and potentially trigger taxes on Social Security benefits.

A tax-efficient strategy to avoid this is to make qualified charitable distributions (QCDs) directly from your retirement account to a charity. You can donate up to $100,000 per year, and the distribution won’t be counted as income.

5. Consider Tax-Efficient Investments

Work with a financial planner to choose investments that generate lower taxable income. Be cautious with municipal bonds, which are often tax-free but still count toward combined income for Social Security tax purposes.

6. Harvest Tax Losses

If you have investments that have lost value, consider selling them to harvest tax losses. These losses can offset gains and reduce your taxable income by up to $3,000 per year, helping you stay below the Social Security tax thresholds.

7. Live Frugally

By reducing your overall living expenses, you’ll need to withdraw less from your taxable retirement accounts. This can lower your AGI, keeping you under the combined income thresholds for Social Security taxation.

8. Use a Health Savings Account (HSA)

For those still working and covered by a high-deductible health plan, contributing to an HSA allows you to save money tax-free for medical expenses.

Withdrawals used for qualified medical expenses are also tax-free, helping you preserve taxable income sources in retirement.

When Social Security Benefits Aren’t Taxable

To avoid taxes on Social Security benefits, you must keep your combined income below:

• $25,000 for single filers.
• $32,000 for married couples filing jointly.

If your income remains under these thresholds, your benefits won’t be taxed at all. However, if you exceed these limits, at least a portion of your benefits will be subject to taxation.

While taxes on Social Security benefits can be frustrating, strategic planning can help reduce how much you owe. Whether you’re considering delaying benefits, making Roth conversions, or living frugally, these approaches can minimize taxes and maximize the money you get to keep.

It’s important to consult a financial advisor to develop a plan that aligns with your retirement goals and to stay aware of your income level to avoid unexpected tax bills. Remember, taxes shouldn’t drive every decision, but smart planning can make a big difference in retirement.

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