How To Avoid Taxes on Social Security Income

Asset Protection Group | Jan 10, 2022

Retirement often does not look exactly as we had pictured. Sometimes there are happy surprises, and at other times retirees feel disappointed by some aspect of their decisions. When it comes to taxes on Social Security benefits, pretty much everyone would agree that is an unwelcome surprise. But there are ways to help minimize or eliminate taxes on these benefits.

The Social Security Administration explains this risk: “Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).”

Your “combined income” will determine whether you owe taxes on your benefits. Combined income consists of the following:

  • Your adjusted gross income
  • Your nontaxable interest
  • One half of your Social Security benefits

Individual tax filers whose combined income falls between $25,000 and $34,000 will owe income taxes on up to 50 percent of their Social Security income. Those who earn above that range can owe taxes on up to 85 percent of their benefits.

As for married, joint filers, those with combined incomes between $32,000 and $44,000 will owe taxes on up to 50 percent of their benefits. Above that range, you can be taxed on up to 85 percent of your Social Security payments.

However, the following strategies can help you avoid taxation on your Social Security benefits:

  1. Wait until full retirement age to claim your payments.
  2. Work a bit less after claiming your benefits, so that you earn under the taxable threshold.
  3. Talk to your financial advisor about how municipal bonds affect your overall combined income and tax rate.
  4. Take withdrawals from a nontaxable Roth account.
  5. Donate part or all of your required minimum distribution to charity.

Of course, you should not take any of the above steps without discussing the correct procedure, and potential consequences, with a skilled financial advisor. Before making any decisions about your retirement income or income taxes, call us to schedule an appointment.