3 Tips for Avoiding Paying Taxes on Social Security Benefits

If you’re trying to determine the right time to begin collecting Social Security benefits, one primary consideration should be your tax situation and what amount of your social security benefit would be taxable. With careful tax planning, you could avoid some or all potential taxes on Social Security benefits and significantly reduce your tax burden.

How Are Social Security Benefits Taxed?

The amount of your Social Security income you will have to pay tax on is determined by your “provisional income.”

This is half of your Social Security income for the year and your modified adjusted gross income (which includes some tax-exempt interest income, such as that paid by municipal bonds).

The Social Security tax income thresholds are listed below. If you cross the income threshold based on your federal income tax filing status, the appropriate portion of your Social Security benefits will be considered taxable income by the federal government.

In addition, residents in these 13 states will have to pay state income taxes: West Virginia, Vermont, Utah, Rhode Island, North Dakota, New Mexico, Nebraska, Montana, Missouri, Minnesota, Kansas, Connecticut, and Colorado.

How Can You Avoid Getting Taxed on Your Social Security Income?

You can reduce the amount of your social security benefits subject to federal income taxes by reducing your modified adjusted gross income below the corresponding threshold. Many retirement planning strategies can be used to accomplish this — here are just three of them:

1. Move taxable retirement savings into a Roth IRA before retiring.

While you’ll have to pay taxes when converting a tax-deferred account into a Roth IRA at the time, you won’t have to pay taxes on your withdrawals. When you begin collecting Social Security benefits, those withdrawals won’t be taxable income to calculate Social Security income taxes.

Whether or not the amount you save on Social Security income taxes offsets the amount of tax you’ll pay during the Roth IRA conversion will depend on your overall financial situation, so it’s essential to make this decision as part of a comprehensive tax planning process to avoid paying more in income tax instead of less.

2. Don’t begin collecting Social Security until you’ve drawn down your pretax retirement accounts. 

Waiting to collect Social Security benefits until later in retirement and drawing down your pretax retirement savings first offers two main benefits.

First, without the increased income from the tax-deferred account withdrawals, staying below the Social Security tax income threshold is easier once you begin to receive benefits.

Second, delaying Social Security benefits can increase the amount you’ll eventually start collecting. After the full retirement age, Social Security benefit amounts increase to 70. Keep working and make more than you did when you were younger. Those income years will increase the overall wage base your Social Security benefits are calculated from.

3. Get a qualified longevity annuity contract (or QLAC). 

This single-premium annuity may help reduce your tax burden on your Social Security benefits. You fund a QLAC from pretax money (such as that from a traditional IRA or 401(k) plan). The insurance company invests your premium during the QLAC’s deferral period, and you can delay receiving regular installment payments until you’re older—up until age 85.

The downside is a limit on premiums, which is $200,000 for 2023. QLACs also used to have a percent-of-benefits limit, but that no longer exists thanks to the Cares Act 2.0. There is also a longevity risk

Protect Your Income With Comprehensive Tax Planning

These and other strategies for reducing taxes on your retirement income, whether from Social Security benefits or investment income, are the best-taken advantage of as part of a comprehensive retirement plan that’s first created well before retirement and updated regularly as your situation evolves. The more after-tax dollars you have in retirement, the more you’ll have to live on.

Our network of financial advisors is experienced in creating retirement plans that help retirees reach their retirement goals and protect their savings. Click here to set up a no-cost, no-obligation appointment to discuss your financial situation and how you may benefit from