Yusra3
VIP Contributor
Social Security benefits provide the majority of income for most retirees but a portion is taxable. Approximately 40% of retirees pay taxes on some of their benefits. Here are 3 strategies for minimizing tax owed:
Reduce Income
How much of Social Security is taxable depends on “combined income” - your adjusted gross income plus any tax-exempt interest plus half of annual Social Security benefits. Staying under the thresholds for your filing status lowers Social Security taxes:
- Single: Combined income of $25,000 - $34,000 taxes up to 50%
- Married filing jointly: Combined income $32,000-$44,000 taxes up to 50%
Lower traditional pretax IRA withdrawals and defer claiming Social Security as long as possible to keep combined income down.
Invest Tax-Free
Municipal bonds and other tax-free investments avoid increasing adjusted gross income used in the combined income formula. These allow other income like Social Security to escape taxation.
Fill Lower Tax Brackets First
withdrawn from traditional IRAs and 401(k)s counts as taxable income for calculating combined income. Withdraw just enough to fill each lower tax bracket then use tax-free funds to avoid jumping to the next bracket. Makes room for more Social Security to be tax-free.
For Example:
Makes more Social Security fall under excluded amounts.
Coordination of income sources and careful tax planning creates levers to minimize retirement income taxes. Consult a tax professional to employ strategies personalized for your situation.
Reduce Income
How much of Social Security is taxable depends on “combined income” - your adjusted gross income plus any tax-exempt interest plus half of annual Social Security benefits. Staying under the thresholds for your filing status lowers Social Security taxes:
- Single: Combined income of $25,000 - $34,000 taxes up to 50%
- Married filing jointly: Combined income $32,000-$44,000 taxes up to 50%
Lower traditional pretax IRA withdrawals and defer claiming Social Security as long as possible to keep combined income down.
Invest Tax-Free
Municipal bonds and other tax-free investments avoid increasing adjusted gross income used in the combined income formula. These allow other income like Social Security to escape taxation.
Fill Lower Tax Brackets First
withdrawn from traditional IRAs and 401(k)s counts as taxable income for calculating combined income. Withdraw just enough to fill each lower tax bracket then use tax-free funds to avoid jumping to the next bracket. Makes room for more Social Security to be tax-free.
For Example:
- Single filer standard deduction: $12,950
- 10% bracket: $10,275
- Withdraw $23,225 from retirement accounts then use municipal bonds and Roth funds to avoid 12% bracket
Makes more Social Security fall under excluded amounts.
Coordination of income sources and careful tax planning creates levers to minimize retirement income taxes. Consult a tax professional to employ strategies personalized for your situation.
