Simple Ways To Minimize Social Security Taxes

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Social security payments are a lifeline for many older Americans, but they may be taxable as well. Although taxation doesn’t apply to all Social Security recipients, it could take away a sizable chunk of money from those it does apply to.

Retirees pay zero taxes if their overall income is below certain thresholds, but the fact is that these thresholds are pretty low. Yes, it is possible to minimize Social Security taxes, but doing so requires careful planning.

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When Are Social Security Benefits Taxable?

As mentioned above, Social Security benefits incur taxes only when a person’s income exceeds a certain threshold. This threshold varies depending on the tax filing status.

For instance, single filers with an annual combined income below $25,000 won’t have to pay taxes on social security benefits. Similarly, the threshold income for those who are married and filing a joint tax return is $32,000. The combined income means the total adjusted gross income (not including Social Security income), tax-exempt interest and 50% of the Social Security income.

Even if your income is above the threshold, you may not have to pay taxes on the full social security benefits. Depending on one’s combined income, one could be liable to pay taxes on 50% or up to 85% of the benefits.

Up to 50% of the benefits are taxable for single filers with combined income between $25,000 and $34,000, while up to 85% of benefits are taxable for those with combined income above $34,000.

Similarly, up to 50% of the benefits are taxable for married filing jointly with combined income between $32,000 and $44,000, while up to 85% is taxable for those with combined income above $44,000.

The Social Security Administration sends you a statement at the end of each year, detailing the benefits you received during the year. Retirees can use this statement to determine how much of their benefit is taxable, and then try to minimize Social Security taxes.

Ways To Minimize Social Security Taxes

Thus far, you should have gotten an idea that you could escape Social Security taxes by keeping your income below the threshold. However, reducing the combined income does not always help and isn’t financially healthy, especially if your income is well above the income threshold.

In such a case, you can’t do much to avoid the taxes, and thus, your goal should be to minimize those taxes, and this is where the below mentioned ways can help you.

Move Income-Generating Assets Into An IRA

One of the best ways to reduce taxable income is to put income-generating assets into your IRA. Doing this means your interest and dividend income from those assets won’t immediately count as income. Also, you could move assets such as growth stocks into taxable accounts, where the assets won’t be taxed until they are sold.

Use Roth Conversions

Using Roth conversions offers two benefits. First is that Roth withdrawals aren't taxed, so they are not considered for calculating the combined income. It must be noted that you will have to pay taxes after the conversion is completed.

The second benefit is that Roth accounts are not subject to required minimum distributions (RMDs). So, converting your pre-tax assets into Roth funds would help you to reduce your taxable income, and in turn, your Social Security tax liability.

Minimize Withdrawals From Retirement Plans

The money that you withdraw from your traditional IRA or traditional 401(k) counts as income in that year, and in turn, increases your adjusted gross income. So, if you minimize such withdrawals, or if possible, don’t withdraw at all, it will help you to reduce your taxable income, or even move the income below the tax-free threshold.

Such a tactic, however, won’t work if you are forced to take an RMD, and it pushes your income above the threshold. On the other hand, if you aren’t required to take an RMD in a given year, then instead of the RMD, you could withdraw money from your Roth IRA or Roth 401(k) to avoid generating taxable income.


Donate RMDs To Charity

If you are forced to take RMDs, then you still have a trick to reduce your taxable income. In such a case, you need to donate the money by December 31 of each tax year to avoid having the proceeds count as taxable income. For this strategy to work, the RMD donation must be transferred directly from your account to the charity.

Use Nontaxable Income Sources

Drawing from other income sources that aren’t taxable could also help you to minimize the taxes. If you believe that you will be subject to high marginal rates, then using income sources that attract little or no taxable income to fund additional spending needs could help greatly to reduce the tax liability.

Final Words

These are the tried and tested ways that can help you to reduce your adjusted gross income to get into the tax-free zone, and if not, at least help you to minimize Social Security taxes.

However, before you adopt them, it is important to examine your financial income, as well as income sources. Having a detailed knowledge of the income and income sources will allow you to make the best use of the above strategies to minimize Social Security taxes.