How to Reduce Taxes on Social Security Benefits: 9 Strategies to Consider

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Many of us look forward to retirement when we can finally relax and enjoy the fruits of our labor, including Social Security benefits. However, there are some factors to consider and understand around these benefits.

For instance, about 40% of retirees receiving Social Security benefits pay taxes on them. Moreover, up to 85% of Social Security benefits could be taxable, depending on one’s income.

Although most of Tencap’s clients are high-net-worth individuals, it pays to know how the government taxes these benefits. By being clear on Social Security taxes, we can be strategic in maximizing your benefits and reducing your tax bill.

Even if you have a well-funded retirement plan, it’s best to examine how social security is taxed and what factors influence the “tax impact” associated with social security benefits. Then, you can leverage strategies to reduce your Social Security benefit taxes and maximize your retirement income. 

How are Social Security Benefits Taxed?

Taxes on your Social Security benefits are based on your provisional income, a threshold above which your Social Security benefits will be taxed. If you are single and have a provisional income of $25,000, you will likely incur tax liability on your Social Security benefits. The threshold increases to $32,000 if you are married.

Here is how to calculate your provisional income: 

  • Start with your adjusted gross income (AGI). AGI is the total income minus deductions or adjustments to income that you are eligible to take. Most strategies for reducing taxes you owe on your Social Security benefits involve reducing your AGI.
  • Include any tax-exempt income you may have earned, like interest from municipal bonds.
  • Finally, add 50% of any Social Security benefits you have received during the tax year.

Determine the 50% of your Social Security benefits and 50% of your provisional income exceeding the above mentioned thresholds. The tax you must pay is the lower of those two numbers.

You can find helpful charts setting forth provisional income levels and taxable Social Security benefits for single and married taxpayers here.

How to Reduce Taxes on Social Security Benefits

The most common way to reduce taxes on Social Security benefits is by lowering your income below certain thresholds. Here are some options you can consider:

1. Delay receiving social security benefits

You can’t be taxed on Social Security benefits you have not received. If you postpone receiving them, your benefits grow by 8% yearly until age 70. 

By drawing down on other assets while reducing the amount of taxable assets, you lower your taxes on Social Security benefits when you start taking them. This may also allow you to withdraw less from retirement accounts, reducing your taxable income.

2. Utilize Roth accounts

Roth IRAs and Roth 401(k)s provide tax-free withdrawals in retirement. When you convert some of your traditional retirement accounts to Roth accounts before retirement, you create a source of income that doesn’t increase your provisional income or your Social Security taxes.

You must be 59 ½ or older and have held your Roth for at least five years to qualify for tax withdrawals. 

This strategy has pros and cons, so consult a qualified financial advisor before implementing it.

3. Manage capital gains

Capital gains increase your provisional income. Consider strategies like tax-loss harvesting, timing the sale of assets, using tax-advantaged retirement accounts for tax-deferred growth, and utilizing charitable giving strategies to reduce your taxable income.

4. Be mindful of withdrawal strategies

Withdraw less from retirement accounts with more significant capital gains and more from accounts with minimal capital gains.

5. Consider asset location

You can minimize taxes with proper asset location. This involves keeping investments, like fixed income, that generate taxable income in tax-deferred accounts and stocks in taxable accounts. 

6. Increase contributions to retirement accounts

You can reduce your AGI by contributing to 401(k) plans and health savings accounts. 

7. Defer income

If you’re self-employed, consider deferring invoices after December 31 to reduce your income in the current taxable year.

8. Relocate to a tax-friendly state

Your state of residence can significantly impact the taxes you pay in retirement. Most states don’t tax Social Security benefits, while others offer special tax breaks to retirees. Consider relocating to a tax-friendly state to reduce your overall tax burden during retirement.

Research the tax laws in different states, then weigh the pros and cons of relocating to one that offers more favorable tax treatment for retirees.

9. Stay informed and seek professional advice

Tax laws and regulations change over time, so it’s crucial to stay informed about the latest developments affecting the taxation of your Social Security benefits. Consultations with a qualified tax professional or financial advisor specializing in retirement planning can provide personalized guidance tailored to your financial situation.

Final Thoughts

Reducing taxes on your Social Security benefits is a smart financial move, regardless of how robust your finances are. By understanding the factors that contribute to the taxation of these benefits and implementing strategic planning, you can minimize your tax liability and enjoy a more financially secure retirement. 

Tencap constantly evaluates strategies behind our clients’ decisions that roll into their tax returns each year. From clients with tens of millions down, our position is that needlessly surrendering your hard-earned money to the government or institutions is unnecessary. By evaluating our clients’ tax bills and incorporating an intelligent yet ethical tax strategy, we can save them a lot of money over their lifetime! 

If you are looking for an advisor with an academic investment methodology, training, and extensive experience with tax strategy, Tencap Wealth Coaching is proud to be leading in this space. With training and experience in helping our clients navigate all things social security, we are prepared to coach on the entire topic. Call us now to schedule your no-cost consultation today! 

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Greg Black, CFP®, ChFC®
Wealth Advisor | + posts

Greg Black is the owner and founder of Tencap Wealth Coaching, an independent investment advisory firm founded on academic investing principles. As a Certified Financial Planner, Greg takes an educational approach to helping his clients be settled and responsible with their financial circumstances. Greg specializes in helping his clients create a proactive plan to minimize the exposure of market conditions while still harnessing the incredible power of global financial markets.

Greg specializes in "complexity" and is skilled at turning a complicated situation into an organized strategy for the families he serves. Greg, and each advisor of Tencap, is a stated fiduciary. You never have to wonder if your best interest is being served. Greg has been transforming the investor experience since 2012.

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