How To Avoid Paying Taxes on Social Security Income Bankrate Caret RightMain Menu Mortgage Mortgages Financing a home purchase Refinancing your existing loan Finding the right lender Additional Resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Bank Banking Compare Accounts Use calculators Get advice Bank reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Credit Card Credit cards Compare by category Compare by credit needed Compare by issuer Get advice Looking for the perfect credit card? Narrow your search with CardMatch Caret RightMain Menu Loan Loans Personal Loans Student Loans Auto Loans Loan calculators Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Invest Investing Best of Brokerages and robo-advisors Learn the basics Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Home Equity Home equity Get the best rates Lender reviews Use calculators Knowledge base Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Loan Home Improvement Real estate Selling a home Buying a home Finding the right agent Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Insurance Insurance Car insurance Homeowners insurance Other insurance Company reviews Elevate your Bankrate experience Get insider access to our best financial tools and content Caret RightMain Menu Retirement Retirement Retirement plans & accounts Learn the basics Retirement calculators Additional resources Elevate your Bankrate experience Get insider access to our best financial tools and content Advertiser Disclosure
Advertiser Disclosure
We are an independent, advertising-supported comparison service. Our goal is to help you make smarter financial decisions by providing you with interactive tools and financial calculators, publishing original and objective content, by enabling you to conduct research and compare information for free - so that you can make financial decisions with confidence.
Bankrate has partnerships with issuers including, but not limited to, American Express, Bank of America, Capital One, Chase, Citi and Discover. How We Make Money
The offers that appear on this site are from companies that compensate us. This compensation may impact how and where products appear on this site, including, for example, the order in which they may appear within the listing categories. But this compensation does not influence the information we publish, or the reviews that you see on this site. We do not include the universe of companies or financial offers that may be available to you. SHARE: laflor/Getty Images March 30, 2022 Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our reporters and editors focus on the points consumers care about most — how to save for retirement, understanding the types of accounts, how to choose investments and more — so you can feel confident when planning for your future. Bankrate logo Editorial integrity
Bankrate follows a strict , so you can trust that we’re putting your interests first. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. Key Principles
We value your trust. Our mission is to provide readers with accurate and unbiased information, and we have editorial standards in place to ensure that happens. Our editors and reporters thoroughly fact-check editorial content to ensure the information you’re reading is accurate. We maintain a firewall between our advertisers and our editorial team. Our editorial team does not receive direct compensation from our advertisers. Editorial Independence
Bankrate’s editorial team writes on behalf of YOU – the reader. Our goal is to give you the best advice to help you make smart personal finance decisions. We follow strict guidelines to ensure that our editorial content is not influenced by advertisers. Our editorial team receives no direct compensation from advertisers, and our content is thoroughly fact-checked to ensure accuracy. So, whether you’re reading an article or a review, you can trust that you’re getting credible and dependable information. Bankrate logo How we make money
You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. Yes, it’s possible to avoid paying on your Social Security income, but it requires some careful maneuvering. While avoiding taxes on your monthly benefit check may sound like a good thing, retirees and other beneficiaries may want to think twice before trying to make it happen. Here’s how the experts say you can avoid taxes on Social Security, why you might not want to, and what taxes you may end up paying on your monthly benefit check. How much of your Social Security is taxable
It’s possible – and perfectly legal – to avoid paying taxes on your . In fact, only about 40 percent of recipients pay any federal tax on their benefit. But here’s the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds: $25,000, if you’re filing as an individual $32,000, if you’re married filing jointly For married filing separately, the Social Security Administration simply says that “you’ll probably pay taxes on your benefits.” Your combined income consists of three parts: Your adjusted gross income, not including Social Security income Tax-exempt interest 50 percent of your Social Security income Add those amounts up and if you’re under the threshold for your filing status, you won’t be paying federal taxes on your benefit. Even if you’re above this threshold, however, you may not have to pay tax on your full benefit. You may pay taxes on only 50 percent of your benefit or on up to 85 percent of it, depending on your combined income. For individual filers: Combined income between $25,000 and $34,000, up to 50 percent of your benefit is taxable Combined income above $34,000, up to 85 percent of your benefit is taxable For married filing jointly: Combined income between $32,000 and $44,000, up to 50 percent of your benefit is taxable Combined income above $44,000, up to 85 percent of your benefit is taxable At the end of each year the Social Security Administration will send you a benefit statement that shows what you received during the year. You can use that to figure out how much of your benefit is taxable and what you might need to do to minimize your taxable income in the year ahead. Here’s how your Social Security benefits are calculated. How to minimize taxes on your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or . And since most people don’t have tax-exempt interest, you’re left with one option. “Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security,” says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California. Here are a few ways to reduce your adjusted gross income to get into the tax-free zone: 1 Move income-generating assets into an IRA
Most retirees are looking to pull money from their rather than put it in, but one way to reduce your income is to put income-generating assets into your IRA, where their interest or dividends won’t count immediately as income. This strategy doesn’t mean you necessarily put new money into an IRA – which might not be possible if you’re not working – but rather move income-producing assets in taxable accounts into the tax-advantaged sheltering of an IRA. At the same time you may be able to shift assets such as growth stocks into taxable accounts, where gains won’t be taxable until the asset is sold. For example, if you have a bond in a taxable account and a growth stock in an IRA, you could sell those and then buy the bond in the IRA and the stock in the taxable account. You’ll reduce your taxable income without reducing your total income. That said, if you make the switch, you’ll want to in your taxable account, defeating the purpose of the switch. 2 Reduce business income
If you’re receiving partnership income or other business income, see if you can minimize it. “Reduce any K-1 or pass-through income from a business by increasing business deductions or expenses,” says Crane. This strategy might not be possible every year, but you could also consider bunching your deductions and expenses into alternating years, so that your Social Security income is taxable every other year. 3 Minimize withdrawals from your retirement plans
Money that you pull from your traditional IRA or will count as income in the year that you withdraw it. So if you can minimize those withdrawals or even not withdraw that money at all, it will help you get close to the tax-free threshold. Of course, this may not be possible if you’re forced to take a (RMD) that pushes you over the edge. If you’re not forced to take an RMD in a given year, consider taking money from your instead and avoid generating taxable income. 4 Donate your required minimum distribution
If you can’t wiggle out of taking your RMD from a traditional IRA, then to get into the tax-free zone. The donation could allow you to deduct the amount from your adjusted gross income. But you’ll have to be eligible for the qualified charitable distribution rule, including being over age 72 and paying the distribution directly from the IRA to the charity. That’s a strategy that Crane suggests, though he acknowledges that some people will have too much income and simply won’t be able to lower their adjusted gross income. 5 Make sure you re taking your maximum capital loss
If you’ve invested in stocks or bonds and have a loss on paper, you might want to sell and realize that loss so you can claim it as a tax deduction. The process is called . The tax code allows you to write off up to a net $3,000 each year in investment losses. A write-off first reduces any other capital gains that you’ve incurred throughout the year. For example, if you have a $3,000 gain on one asset but a $6,000 loss on another, you can claim a deduction for the full $3,000 net loss. Any net loss beyond that $3,000 has to be carried forward to future years, at which point it can be used. And even if you can’t realize the full value of that net loss, it can still make sense to realize some loss, especially if it pushes your Social Security benefit into the tax-free area. Tax-loss harvesting works only in taxable accounts, not special tax-advantaged accounts such as an IRA. Other things to watch out for
While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, it’s important that you keep things in perspective. “Tax strategy should be part of your overall financial planning,” says Crane. “Don’t let tax strategy be the tail that wags the dog.” In other words, make the financial moves that maximize your after-tax income, but don’t make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find rather than minimizing your taxes. And it could be financially smart to first avoid some of the biggest Social Security blunders. Don’t forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so it’s important to investigate how your state treats Social Security. “There really aren’t any tricks, you just have to be careful with your interest and dividends,” says Paul Miller, CPA, of Miller & Company in the New York City area. Bottom line
While the idea of tax-free Social Security is nice – and many people do avoid federal taxes on their benefit check – the cost of that is having an income that’s under a relatively low threshold. If you can make some sensible changes to how you realize income, then aiming for tax-free Social Security could make sense. But for many others, it would require a massive overhaul of their lifestyle or is otherwise simply impossible given their income and assets. Learn more
SHARE: Bankrate senior reporter James F. Royal, Ph.D., covers investing and wealth management. His work has been cited by CNBC, the Washington Post, The New York Times and more. Brian Beers is the managing editor for the Wealth team at Bankrate. He oversees editorial coverage of banking, investing, the economy and all things money. Related Articles