Social Security Taxes: What You Can Do to Minimize Them
For many Americans, Social Security benefits are a crucial part of retirement income. However, these benefits may be subject to federal taxes depending on your total income. Knowing how and when Social Security benefits are taxed, and what you can do to reduce that tax burden, is key to maximizing your retirement funds.
In this article, we’ll explain how Social Security benefits are taxed and provide actionable steps you can take to minimize the taxes you owe on those benefits.
How Social Security Taxes Work
Your Social Security benefits can be taxed at the federal level if your total income exceeds a certain threshold. The amount of your benefits that are taxed depends on your “combined income,” which is calculated as follows:
- Combined Income = Adjusted Gross Income (AGI) + Nontaxable Interest + 50% of Your Social Security Benefits
Depending on your combined income and filing status, a portion of your benefits will be subject to taxation:
- Single filers with combined income between $25,000 and $34,000 may have to pay taxes on up to 50% of their Social Security benefits. If their combined income exceeds $34,000, they may be taxed on up to 85% of their benefits.
- Married couples filing jointly with combined income between $32,000 and $44,000 may pay taxes on up to 50% of their benefits. If their combined income exceeds $44,000, they could be taxed on up to 85% of their Social Security income.
These thresholds have not been adjusted for inflation, which means more retirees are finding themselves paying taxes on Social Security benefits than ever before.
Proposed Changes to Social Security Taxation
Both Donald Trump and Kamala Harris have suggested eliminating or reducing taxes on Social Security benefits, which would provide substantial relief to retirees. Trump has proposed eliminating federal taxes on Social Security benefits entirely, arguing that these taxes unfairly penalize retirees who have already contributed to the system through payroll taxes. Kamala Harris has supported similar ideas, proposing tax cuts for retirees earning under $400,000 annually, which would ensure the middle class benefits from reduced tax burdens on their retirement income(Kiplinger.com).
While the exact details and timelines for these changes remain uncertain, they are likely to be significant talking points in the upcoming election. If implemented, these changes could reduce or eliminate taxes for millions of Americans relying on Social Security in retirement.
What You Can Do to Reduce Social Security Taxes Now
While future policy changes could make Social Security more tax-friendly, there are several steps you can take right now to reduce the taxes you owe on your benefits:
- Keep Your Combined Income Below the Tax Thresholds: If possible, aim to keep your combined income below the $25,000 (single) or $32,000 (married filing jointly) thresholds. This could be done by strategically withdrawing from retirement accounts, such as using Roth IRAs (which don’t count toward AGI) or timing withdrawals from traditional IRAs.
- Consider Roth IRA Conversions: By converting traditional IRA funds to a Roth IRA, you’ll pay taxes on the converted amount now but avoid having that income count against you when calculating combined income in the future. This can reduce the likelihood that your Social Security benefits will be taxed.
- Delay Taking Social Security: Delaying Social Security benefits until age 70 allows your benefits to grow and may also give you time to reduce your taxable income through other means, such as living off savings or doing Roth conversions in lower tax years.
- Take Advantage of Tax Credits: Certain tax credits, such as the Saver’s Credit, may help offset the taxes you owe. This credit is available to low- and moderate-income individuals saving for retirement, which can help reduce your overall tax burden.
- Work with a Financial Planner: Tax planning in retirement can be complex, especially when it comes to Social Security benefits. A financial planner or tax professional can help you craft a strategy that minimizes your tax burden while maximizing your income in retirement.
Conclusion
Taxes on Social Security benefits can be a surprise for many retirees, but with careful planning, you can reduce or eliminate those taxes. Keeping your combined income low, considering Roth conversions, and delaying Social Security are just a few strategies that can help. Additionally, proposals from political leaders like Donald Trump and Kamala Harris may bring relief in the future by reducing or eliminating taxes on Social Security altogether.
For personalized advice on minimizing Social Security taxes, reach out to USA Tax Solutions to discuss your retirement tax planning options.
