How to Lower Social Security Tax on Your Retirement Income

Social Security benefits can be subject to federal taxes depending on total retirement income. For retirees relying on multiple income sources, this tax burden can reduce the amount they ultimately receive. Managing income strategically can help minimize these taxes and stretch retirement savings further.

Filing Status Changes

Tax liability on Social Security benefits is based on combined income, which includes adjusted gross income (AGI), nontaxable interest, and half of Social Security benefits. Filing status plays a key role in determining how much of these benefits are taxed.

For single filers, benefits become taxable when combined income exceeds $25,000, with up to 85% taxable once income surpasses $34,000. Married couples filing jointly face higher thresholds, with taxation beginning at $32,000 and reaching the 85% maximum at $44,000. Those filing separately while living with their spouse often see up to 85% of their benefits taxed regardless of income level.

In some cases, filing separately may be beneficial if one spouse has significant medical expenses or deductible losses that would be more advantageous on an individual return. However, this approach requires careful analysis, as it can lead to higher overall taxes on benefits. Widowed individuals may qualify for more favorable tax treatment by filing as a qualifying widow(er) for up to two years after their spouse’s death, allowing them to use the joint filer income thresholds.

Provisional Income Thresholds

The IRS uses provisional income to determine how much of Social Security benefits are taxable. This figure includes AGI, tax-exempt interest, and 50% of Social Security benefits. If provisional income stays below certain limits, benefits remain tax-free, but exceeding these thresholds triggers taxation on a portion of the benefits.

For 2024, individuals with provisional income under $25,000 pay no tax on their benefits. Those between $25,000 and $34,000 see up to 50% of benefits taxed, while beyond $34,000, as much as 85% is taxable. For married couples filing jointly, the tax-free threshold is $32,000, with the 50% taxation range extending to $44,000 before reaching the 85% maximum. These thresholds have remained unchanged for decades, meaning more retirees are affected as incomes rise.

Managing provisional income effectively can help reduce taxable benefits. Drawing from Roth IRAs, which do not count toward provisional income, or spreading withdrawals from taxable accounts over multiple years can help keep income below the higher taxation brackets. Municipal bond interest, while exempt from regular federal income tax, is included in provisional income calculations, meaning it can unexpectedly push retirees into a higher taxation tier.

Deferred Income Sources

Delaying withdrawals from tax-deferred accounts like traditional IRAs and 401(k)s can help retirees manage how much of their Social Security benefits are taxed each year. Since these distributions count as taxable income, taking them too soon can push retirees into higher tax brackets, increasing the portion of benefits subject to taxation. By timing withdrawals strategically, retirees can maintain lower income levels in years when Social Security is their primary source of funds.

Annuities that allow tax-deferred growth offer another way to manage taxable income. Fixed and variable annuities provide the option to delay payouts, meaning retirees can control when income becomes taxable. Non-qualified annuities, funded with after-tax dollars, offer further flexibility since only the earnings portion of withdrawals is taxable, reducing the impact on overall income levels.

For those with capital gains, deferring the sale of assets can also help manage taxable income. Selling appreciated stocks, mutual funds, or real estate in a single year can create a spike in income, increasing Social Security tax liability. Instead, using strategies like tax-loss harvesting or spreading sales over multiple years can help smooth income and avoid unnecessary taxation.

Roth Conversion Strategies

Shifting funds from tax-deferred retirement accounts into a Roth IRA can reduce future tax burdens on Social Security benefits. Since Roth IRA withdrawals are not included in taxable income, they do not contribute to the calculation that determines whether benefits are taxed. By converting traditional IRA or 401(k) assets to a Roth IRA before claiming Social Security, retirees can lower their taxable income in later years, helping to avoid taxation on benefits.

Timing is key. Converting too much in a single year can push income into a higher tax bracket, increasing marginal tax rates and potentially triggering Medicare IRMAA surcharges. A phased approach, where smaller conversions are made over several years, helps mitigate this risk. For example, a retiree in the 12% tax bracket might convert just enough each year to stay within that bracket, rather than pushing into the 22% range. Using years with lower income, such as the period between retirement and when required minimum distributions (RMDs) begin at age 73, can be an ideal window for conversions.

Coordination with Pensions

For retirees receiving pension income, careful planning is necessary to avoid unnecessary taxation on Social Security benefits. Since pension payments are typically considered taxable income, they contribute to the provisional income calculation, potentially increasing the portion of benefits subject to tax.

One approach is selecting a pension payout option that minimizes taxable income in years when Social Security benefits begin. Lump-sum distributions can create a sudden spike in income, pushing more benefits into the taxable range. Instead, opting for a monthly pension payout may help spread income more evenly over time, preventing large fluctuations that could trigger higher taxation. Some retirees may also have the option to roll over a lump-sum pension into an IRA, allowing for more control over withdrawals and tax planning.

Pensions with cost-of-living adjustments (COLAs) gradually increase taxable income over time, potentially affecting Social Security taxation in later years. Retirees who anticipate rising pension income may benefit from drawing down other taxable accounts earlier in retirement to keep provisional income lower once COLAs take effect. Additionally, some pensions offer partial survivor benefits, which can impact a surviving spouse’s tax situation. Evaluating these options in advance can help retirees optimize their overall tax strategy.