How Social Security Gets Taxed and Legal Ways to Avoid It
Key Points
Up to 85% of Social Security benefits may be taxable by the IRS.
The key to minimizing and even avoiding taxes on Social Security benefits is to reduce your combined income.
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Don't make the mistake of assuming your Social Security benefits are tax-free. Sure, many Americans don't have to pay federal taxes on Social Security. Depending on where you live, you may not have to pay state taxes, either.
However, it's possible you could still owe Uncle Sam. That's why understanding the tax implications of Social Security is a key part of retirement planning. Here's how Social Security gets taxed -- and some legal ways to avoid it.
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How Social Security benefits are taxed
The most important thing to know about taxes on Social Security is that they're based on your income. However, you can't simply look at how much your benefits pay plus other retirement income from 401(k) plans or IRAs.
Instead, the IRS uses a formula to calculate combined income (or provisional income). Combined income is calculated by adding your adjusted gross income (AGI) plus nontaxable interest received plus 50% of your Social Security benefits.
Not all of your combined income is taxable, though. The following table shows when taxes may apply:
| Filing Type | Combined Income | Taxable Social Security Benefits |
|---|---|---|
| Single, head of household, or qualifying widow/widower | $25,000 or less | None |
| $25,000 to $34,000 | Up to 50% | |
| More than $34,000 | Up to 85% | |
| Married filing jointly | $32,000 or less | None |
| $32,000 to $44,000 | Up to 50% | |
| More than $44,000 | Up to 85% |
Data source: Internal Revenue Service. Table created by the author.
Ways to minimize your Social Security benefit taxes
The key to legally minimizing and even avoiding federal taxes on Social Security benefits is to reduce your combined income. If you're 65 or older, you already have a built-in way to achieve this goal. The enhanced deduction for seniors included in the One Big Beautiful Bill Act should help many retirees reduce their tax liability on Social Security benefits. However, this deduction is no longer available after 2028.
Withdrawing from Roth IRAs and 401(k) plans is a great way to lower your combined income. These withdrawals aren't taxable. Shifting your retirement investments to tax-efficient alternatives can also help reduce your combined income. Municipal bonds, for example, are one attractive option for this strategy.
Time the sale of assets in taxable accounts or real estate wisely. Big gains from such sales could boost your combined income into a higher tax bracket.
Coordinate your retirement income with your spouse. Staggering when you withdraw from retirement accounts or adjusting who claims Social Security benefits first can make a difference in your combined income.
Anyone ages 70 1/2 or older must take Required Minimum Distributions (RMDs) from their traditional IRAs and 401(k) plans. Using Qualified Charitable Distributions (QCDs) to donate to your favorite charities can satisfy RMDs without increasing your combined income.
If you need help, talk with a reputable financial planner about the best moves to lower your taxes on Social Security benefits.
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