Like many Americans who have reached retirement age, you might be surprised to learn that Uncle Sam can tax your Social Security payments. Exactly how much of your Social Security benefits are subject to tax depends on your tax filing status and what’s commonly referred to as your “provisional income” (or sometimes called “combined income”).
If you rely solely on Social Security for your retirement income, there’s a good chance you won’t have to pay income taxes on any of your monthly Social Security payments. That’s because your provisional income will likely be too low to trigger federal taxes on your benefits.
On the other hand, if you have other sources of taxable income—such as wages, pension payments, traditional IRA and 401(k) retirement accounts, or rental income—your provisional income is probably going to be over the Social Security tax threshold. If that happens, you’ll owe taxes on some of your Social Security benefits.
Fortunately, the strategies outlined below can help you minimize or even completely avoid taxes on Social Security benefits. The key is reducing the taxable income included in your provisional income. If the combined income that makes up your provisional income is lower, then you might end up paying taxes on a smaller percentage of your Social Security benefits. If the percentage is lower, then so will the tax bill on your benefits.
Related: What Tax Bracket Are You In?
How Federal Taxes on Social Security Are Calculated
Before getting into the methods for lowering or avoiding taxes on your Social Security benefits, a quick review of how Social Security taxes work is probably useful. (You can find a full discussion of taxes on Social Security income at How Are Social Security Benefits Taxed?)
0% Tax on Social Security Benefits
In a nutshell, you won’t owe taxes on any of your Social Security income if your provisional income is below the following thresholds:
- $32,000 or less for married couples filing a joint return
- $25,000 or less for single filers, head-of-household filers, surviving spouses, and married people filing separately who lived apart from their spouse for the entire year
50% or 85% Tax on Social Security Benefits
If your provisional income is above the applicable threshold amount, you’ll owe taxes on some of your Social Security. If you’re married and filing a separate tax return, you’ll also pay federal income tax on a portion of your Social Security benefits, regardless of your provisional income, if you lived with your spouse for any part of the tax year.
How much of your Social Security is taxable if your provisional income is above the threshold is as follows:
- For married couples filing a joint return, up to 50% of your Social Security income is taxed if your provisional income is between $32,001 and $44,000, while you’ll pay income tax on up to 85% of your benefits if your provisional income is more than $44,000.
- For single filers, head-of-household filers, surviving spouses, and married people filing separately who lived apart from their spouse for the entire year, you’ll pay tax on up to 50% of your Social Security benefits if your provisional income is between $25,001 and $34,000. If your provisional income is more than $34,000, up to 85% of your benefits will be taxed.
- Married taxpayers filing a separate federal tax return who lived together for any part of the year will pay income tax on up to 85% of their Social Security payments.
Caution: Unlike many other dollar amounts in the U.S. tax code, the provisional income thresholds aren’t adjusted each year to account for inflation. As a result, as your Social Security payments increase with annual cost-of-living adjustments (known as “COLA”), you run the risk of being pushed above a threshold amount and subjecting more of your benefits to taxation. If the thresholds were adjusted for inflation, the thresholds would rise at the same rate as your Social Security payments.
What Is Provisional Income?
Provisional income is generally the combined total of 50% of your Social Security benefits, modified adjusted gross income, and tax-exempt interest.
In most cases, your modified adjusted gross income is equal to the adjusted gross income reported on your federal income tax return (Line 11 on your Form 1040), minus any income tax deduction or exclusion for:
- Student loan interest
- Employer-provided adoption benefits
- Foreign earned income or housing
- Income earned by residents of American Samoa or Puerto Rico
If your tax filing status is married filing jointly, include amounts for both spouses when calculating your provisional income.
Social Security Benefit Statements
Once you start receiving Social Security benefits, the Social Security Administration will send you a Social Security Benefit Statement each year (Form SSA-1099). Use the amount listed in Box 5 from each SSA-1099 form you receive when calculating 50% of your Social Security benefits. (You should receive Form RRB-1099 if you receive railroad retirement benefits treated as Social Security.)
Related: What’s Your Standard Deduction?
How to Avoid Taxes on Social Security Benefits
With some basic knowledge about Social Security taxes in hand, let’s now dive into how you can avoid, or at least minimize, taxes on Social Security benefits.
The secret is reducing the taxable income—other than your Social Security benefits—that makes up your modified adjusted gross income. Once that figure comes down, so will your provisional income. And if your provisional income is reduced enough, the amount of Social Security income subject to tax could drop from 85% to 50%, or from 50% to nothing.
So, without further ado, here are several ways to avoid or minimize taxes on your Social Security benefits. Any single method might not impact taxes on your Social Security income, so look for multiple tax-saving opportunities that might work for you. We recommend working with a qualified tax advisor or financial advisor to create a comprehensive retirement income plan that’s right for you.
1. Contribute to Traditional Retirement Accounts
If you still work while receiving Social Security benefits, you can still contribute to a traditional IRA or 401(k) account. While the money you earn from your job will increase your adjusted gross income, the amount you contribute to traditional retirement accounts will bring it back down a bit. That’s because those contributions will be on a “pre-tax” basis—meaning they won’t be included in your adjusted gross income.
YATI Tax Tip: With a traditional IRA, you will have to claim a tax deduction to remove any contributions from your gross income, while contributions to a traditional 401(k) account aren’t included as wages on your W-2 form.
For 2023, anyone 50 years of age or older can contribute up to $7,500 to an IRA. In most cases, IRA contributions also can’t exceed your earned income for the year. Contributions for 2023 must be made by April 15, 2024 (April 17 for residents of Maine and Massachusetts), which will be the last day to file taxes for the 2023 tax year.
There’s also a limit on annual contributions to 401(k) plans, which must be made before the end of each calendar year. For 2023, the limit for people age 50 or older is $30,000.
Related: IRA vs. 401(k): How These Retirement Accounts Differ
2. Withdraw Money From Traditional Retirement Accounts Before Social Security Payments Begin
If you have a traditional IRA or 401(k) account, consider withdrawing funds from the account before you start receiving Social Security benefits. Why? Because distributions from these traditional retirement accounts are included in adjusted gross income, which increases your provisional income.
This will also impact required minimum distributions (RMDs) from the account down the road, since the amount of each RMD is based on the account balance at the end of the previous tax year. So, you’ll have smaller RMDs once you start receiving Social Security benefits if you draw down the account before getting benefits. And, since RMDs from traditional retirement accounts are taxable, that also means you’ll have less combined income to boost your provisional income when you’re receiving Social Security benefits.
3. Do a Roth Conversion Before Social Security Payments Begin
Unlike traditional IRAs and 401(k) plans, you don’t have to pay taxes on distributions from Roth IRAs or Roth 401(k) accounts. While you don’t get a tax break when you make contributions to these retirement accounts like you do with traditional IRAs or 401(k) plans, you get tax-free retirement income when you take the money out of Roth IRAs and Roth 401(k) accounts.
If you have money in a traditional account, you can roll it over into a Roth IRA or Roth 401(k) account before you start drawing Social Security. This process is known as a Roth conversion. That way, when you withdraw money down the road from the Roth account, it won’t be included in your adjusted gross income, so it won’t raise your provisional income. That, in turn, might help you minimize taxes on your Social Security benefits in the future.
But there’s a catch! When you transfer funds from a traditional retirement account to a Roth IRA or Roth 401(k), you’ll have to pay taxes on the amount rolled over in the year of the conversion. The IRS isn’t going to let you get away with completely avoiding federal taxes on money in the traditional account. Plus, tax-free withdrawals of earnings from a Roth IRA are generally not allowed for five years after a Roth conversion.
Related: Best Investments for Roth IRA Accounts
4. Contribute to a Health Savings Account
As with contributions to traditional IRAs and 401(k) plans, contributions to a health savings account are generally made on a pre-tax basis. As a result, you might be able to claim a tax deduction for contributions to an HSA, which will reduce your adjusted gross income. You have until April 15, 2024 (April 17 for residents of Maine and Massachusetts), to make HSA contributions for the 2023 tax year.
There are several important restrictions, though. For example, you have to be covered under a high-deductible health plan (HDHP) to contribute to an HSA. The HDHP must also satisfy certain requirements regarding annual deductibles and maximum out-of-pocket expenses.
As with IRAs and 401(k) plans, there are also annual HSA contribution limits. If you have self-only coverage under an HDHP and are at least 55 years old at the end of the year, you can contribute up to $4,850 for 2023 ($5,150 for 2024). If you have family coverage in 2023 and are at least 55 by year’s end, the limit is $8,750 ($9,300 for 2024).
In addition, you can’t contribute to an HSA or claim the deduction if you’re enrolled in Medicare. However, people who claim Social Security before turning 65 won’t have to worry about this restriction.
You also can contribute to an HSA if you can be claimed as a dependent on someone else’s federal return.
Related: Best Health Savings Account Providers
5. Set Up a Qualified Charitable Distribution
Charitable-minded seniors who are at least 70½ years old can reduce their gross income by setting up a qualified charitable distribution (QCD) from an IRA. With a QCD, up to $100,000 can go directly from your IRA to charity (the $100,000 maximum will be adjusted for inflation beginning in 2024). Since you don’t touch the money in between, it isn’t included in gross income and doesn’t increase your provisional income.
A QCD of up to $50,000 can be made to a charitable remainder annuity trust, charitable remainder unitrust, or charitable gift annuity (this dollar amount will also be adjusted for inflation starting in 2024). The catch is that you can only make this type of QCD once.
QCDs offer another advantage that can help reduce taxes on your Social Security benefits: The amount distributed from a traditional IRA as a QCD counts toward your RMD. That means you’ll have to withdraw fewer additional funds from your IRA to satisfy the RMD rules, which means less taxable retirement income included in your provisional income.
6. Manage Capital Gains and Losses
Do you dabble in the market or have stocks tucked away in taxable accounts? If so, you might be able to reduce your adjusted gross income—and, thus, your provisional income—through careful management of those assets.
One way is to hold on to appreciated stocks and other capital assets if your provisional income is close to one of the threshold amounts that can trigger a greater portion of your Social Security income being taxed. Pushing the sale of those assets to the following year will also push back the infusion of capital gain into your gross income. If that means you end up holding an asset for more than one year, you’ll also benefit from lower capital gains tax rates.
On the other hand, if you have stocks or other assets that have decreased in value, selling them to realize capital losses can help you trim Social Security taxes. The losses can be used to offset capital gains, which will reduce your gross income. Plus, if losses exceed gains, then some of the losses can also be used to reduce other income that would otherwise be included in your provisional income. The strategy of selling assets to generate capital losses that will offset gains or other income is known as “tax-loss harvesting.”
YATI Tip: Watch out for the wash sale rule if you’re selling stock to generate a loss. The rule basically says you can’t offset capital gains or claim a deduction against ordinary income with losses from the sale of stock or securities if you buy or otherwise acquire the same or substantially identical stock or securities within 30 days before or after the sale.
7. Be Careful With Municipal Bonds
Ordinarily, investing in municipal bonds can cut your tax bill. That’s because you don’t have to pay income tax on the interest you receive from state or local government bonds (at least not on the federal level).
However, remember that provisional income includes any nontaxable interest. So, while you might not have to pay tax on interest from municipal bonds, that interest could push your provisional income past one of the thresholds used to determine the percentage of your Social Security benefits that are subject to tax. As a result, consult with your financial advisor before creating a retirement income strategy that relies too heavily on nontaxable interest from municipal bonds.
8. Manage Self-Employment Deductions and Income
Many retirees continue to work after they begin receiving Social Security payments, and many of them work for themselves as consultants, daycare providers, freelance writers, or other gig workers. So, if you’re self-employed, make sure you take all the deductions against business income you’re entitled to on Schedule C (Form 1040). By reducing your taxable net profit, or even generating a business loss, you’ll lower your modified adjusted gross income and, as a result, lower your provisional income, too.
Other tax deductions for self-employed people might be available, too. For example, if you’re self-employed, you might be able to deduct a portion of your self-employment tax, contributions to a Simplified Employee Pension (SEP) account, or health-insurance premiums for yourself and your family. All of these deductions will help lower your gross income.
If you’re close to paying taxes on a larger portion of your Social Security benefits, consider pushing year-end invoices into the next year. That can push some of your taxable income from self-employment to the next year.
Related: Solo 401(k) vs. SEP IRA: What’s the Difference?
9. Purchase a Qualified Longevity Annuity Contract (QLAC)
A qualified longevity annuity contract (QLAC) might also help reduce the federal income tax on your Social Security benefits. Basically, a QLAC is an annuity contract that’s purchased with funds in an IRA, 401(k), or similar retirement account. Annuity payments start at a predetermined date, but no later than your 85th birthday, and continue for the rest of your life. You can use up to $200,000 of retirement account funds to purchase a QLAC (the amount will be adjusted for inflation each year beginning in 2024). All in all, QLACs are often a good option for people who are worried about outliving their retirement account savings.
So, how can QLACs lower taxes on your Social Security benefits? By lowering your RMDs without adding taxable income on your return until the annuity payments begin. The retirement funds used to purchase a QLAC aren’t counted when your RMD amount is calculated each year. That means you’ll have to withdraw less taxable income from your traditional retirement accounts each year, which means a lower provisional income.
Careful planning is required with QLACs, though. Once the annuity payments begin, you’ll have more taxable income. So, down the road, federal taxes on your Social Security could potentially rise.
10. Move to a Different State
So far, we’ve only talked about federal taxes on Social Security income. However, 12 states currently tax Social Security benefits to one extent or another. Those states are Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
If you live in one of these states and are paying state income taxes on your Social Security benefits, consider moving to a different state—maybe even to a jurisdiction with no state income tax at all. Yes, that can be a big step. But if you’re thinking of relocating in retirement anyway, make sure you at least check out the state tax burden for retirees in the new state before packing your bags.
YATI Tip: The trend is definitely toward less (or no) state income taxes on Social Security benefits. Starting in 2024, Missouri and Nebraska will completely eliminate taxes on Social Security payments. Plus, Minnesota and Utah enacted legislation in 2023 to roll back taxes on benefits.
11. Withholding or Estimated Taxes for Social Security Payments
While it won’t actually reduce the federal taxes owed on your Social Security benefits, you can cut the tax bill due when you file your return by having federal taxes withheld from your Social Security payments. It’s easy to have taxes withheld from payments. Just complete Form W-4V and send it to your local Social Security Administration office. Taxes can be withheld at either a 7%, 10%, 12%, or 22% rate.
If you don’t want to have federal taxes withheld from your Social Security payments, you can make quarterly estimated tax payments instead. Form 1040-ES is used to file and pay estimated taxes, although you can also file and pay electronically on the IRS website. Worksheets in the instructions for Form 1040-ES will help you calculate the amount of each estimated payment.
With either method, you’re simply paying taxes in advance. So, when it’s time to file your tax return, you then get to subtract any amount withheld or estimated taxes paid from what you would otherwise owe. This can also result in a larger tax refund, which usually makes people pretty happy.
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