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How to Minimize Social Security Taxes

How to Minimize Social Security Taxes

October 19, 2021

Sixty-four million Americans received Social Security in 2020. For those who receive Social Security benefits, it’s important to know if that income is taxable. A majority of people who receive Social Security benefits, pay income taxes on 50-85% of their Social Security income. Luckily, there are strategies that you can use before and after retiring to limit the taxes you pay on your benefits.

Stay Under the Taxable Thresholds

Social Security benefits are taxable if the sum of your adjusted gross income, nontaxable interest, and one half of your Social Security benefit is over $25,000 as an individual and $32,000 as a married couple. If all three income sources equal somewhere between $25,000 to $34,000 as an individual and $32,000 to $44,000 as a married couple, income taxes will be due on one half of your Social Security benefit. If your income from those sources tops $34,000 for an individual and $44,000 for a couple, income tax will be due on 85% of your Social Security benefit.

Manage Your Other Income Sources

People in retirement who have income other than their Social Security benefit will typically have to pay taxes on part of their Social Security income. Pension payments, dividends and interest from savings and investments, income from a job, and withdrawals from retirement savings accounts are sources of income that can make your Social Security benefits taxable.

Consider Taking IRA Withdrawals Before Taking Social Security

For an IRA, you are able to start taking penalty free distributions after age 59 and ½. However, you are not required to take minimum withdrawals until after age 72. You may be able to lower your Social Security income taxes if you take distributions from your retirement savings accounts for several years before signing up for Social Security benefits.

Utilize a Roth IRA

Distributions from Roth accounts after 59 and ½, if the account is at least 5 years old, are not taxable and do not contribute to the taxation of Social Security benefits. Using an after-tax Roth account to save for retirement allows you to have tax-free withdrawals once you are in retirement and minimize taxes on Social Security benefits.

Consider State Taxes

Surprisingly, most states do not tax Social Security income. Only 13 states tax Social Security income, with some exceptions for low-income retirees. These states include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia.

Set Up Social Security Withholding

People who pay taxes on their Social Security benefits can make quarterly estimated tax payments or have federal taxes withheld from their monthly payments. There are 7%, 10%, 12% and 22% withholding options. This is a much more convenient approach than paying a tax bill each quarter.

If you are looking for a way to minimize Social Security taxes, please contact us at Bernard R. Wolfe and Associates. We will be able to assist you in a tax-advantaged retirement income plan. Give us a call today to get started.