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3 Simple Ways to Reduce Your Social Security Taxes

Did you know that nearly 97% of Americans between the ages of 60 and 89 receive (or will receive) Social Security benefits? On average, the monthly benefit amounts to around $1,614 or roughly $19,370 per year. For most retirees, this is not enough income to live on. Many supplement their Social Security benefits with other income sources which can have an impact on their taxes. If you’re one of the millions who receive benefits, be sure to check out these simple ways to reduce your Social Security taxes.

When is Social Security Taxable?

Under IRS rules, your Social Security is taxable if your combined gross income exceeds the maximum allowed for your filing status. Your combined income is calculated by adding non-taxable interest and half of your Social Security benefits to your adjusted gross income (AGI). Depending on your combined income total, zero to 85% of your Social Security benefits could be taxed.

Social Security Income Thresholds

When the Social Security income thresholds were set in 1983, about 8% of beneficiaries were required to pay tax on a portion of their benefits. Unfortunately, those thresholds haven’t increased over time. This means that you’re more likely to pay taxes on your benefits unless your combined gross income is below $25,000 ($32,000 for married couples). If it exceeds that amount, up to 85% of your benefits may be taxable.

  • You’ll pay income tax on up to 50% of your benefits if your income is between $25,000 and $34,000 ($32,000 and $44,000 for couples).
  • For combined gross incomes exceeding $34,000 ($44,000 if married), up to 85% of your benefits are taxable.

Today, it’s estimated that nearly 50% of those receiving benefits pay income tax on some portion of the money they receive.

Ways to Reduce Your Social Security Taxes

Thankfully, there are simple ways to reduce your Social Security taxes. Here are just a few to get you started.

Withdraw From Retirement Accounts Before Tapping Social Security

Although you can start receiving Social Security benefits at age 62, it may be beneficial to prolong this for as long as possible, especially if you’re also withdrawing funds from a retirement account. That’s because receiving income from both could result in your Social Security benefits being taxed.

If you have a traditional retirement account, such as an IRA or 401(k), you can withdraw money before tapping into Social Security. Withdrawals made after the age of 59 ½ will not incur a penalty. Just be sure to consider any other taxes you may need to pay when withdrawing from your tax-deferred accounts. With a little planning, you can boost your pre-retirement income and potentially increase the size of your Social Security payments while keeping your taxes to a minimum.

Move Some Money to a Roth IRA

Another way to reduce your Social Security taxes is to move your money into a Roth IRA. If you’re 59 ½ or older and the account is at least five years old, distributions from a Roth IRA aren’t taxable and won’t count toward your combined income. By planning ahead, you can not only ensure you have plenty of money to live on, but also pay fewer taxes on your Social Security payments.

Donate Your Required Minimum Distributions

If you have a tax-deferred retirement account and must take a required minimum distribution (RMD), one way to reduce your tax liability and save on Social Security taxes is to donate your RMD. This is known as a qualified charitable distribution (QCD) and allows you to directly donate your RMD to an eligible charity.

To qualify, you must be at least 72 years of age and the money must come directly from your IRA. The donation must also be made by December 31. With a QCD, the donation is treated as a charitable contribution but does not count as taxable income. By keeping your taxable income lower, it can help reduce or even eliminate any taxes on your Social Security benefits. You’ll also avoid paying income taxes on otherwise taxable distributions.

The maximum annual amount you can donate through QCDs is $100,000 (total for all charities). If you’re married and filing jointly, each of you can contribute up to $100,000.

Bottom Line

Finding ways to reduce your Social Security taxes during retirement can feel a bit overwhelming. With the help of an experienced tax professional, however, you can chart a course for success. At Tax Defense Network, we’ll help you put together a financial plan that fits your goals and keeps your tax liability to a minimum. To learn more about our affordable tax planning services, call 855-476-6920 for a free consultation.