Can You Cut Taxes You Pay on Your Social Security?
If you have a moderate or low income but earn a lot in interest and dividends from investments that you don't need for living expenses, here is one way you may be able to lower your tax bill.
You are now subscribed
Your newsletter sign-up was successful
Want to add more newsletters?
Delivered daily
Kiplinger Today
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more delivered daily. Smart money moves start here.
Sent five days a week
Kiplinger A Step Ahead
Get practical help to make better financial decisions in your everyday life, from spending to savings on top deals.
Delivered daily
Kiplinger Closing Bell
Get today's biggest financial and investing headlines delivered to your inbox every day the U.S. stock market is open.
Sent twice a week
Kiplinger Adviser Intel
Financial pros across the country share best practices and fresh tactics to preserve and grow your wealth.
Delivered weekly
Kiplinger Tax Tips
Trim your federal and state tax bills with practical tax-planning and tax-cutting strategies.
Sent twice a week
Kiplinger Retirement Tips
Your twice-a-week guide to planning and enjoying a financially secure and richly rewarding retirement
Sent bimonthly.
Kiplinger Adviser Angle
Insights for advisers, wealth managers and other financial professionals.
Sent twice a week
Kiplinger Investing Weekly
Your twice-a-week roundup of promising stocks, funds, companies and industries you should consider, ones you should avoid, and why.
Sent weekly for six weeks
Kiplinger Invest for Retirement
Your step-by-step six-part series on how to invest for retirement, from devising a successful strategy to exactly which investments to choose.
Can you really do some proactive things to reduce the taxes you pay on your Social Security? Sometimes you can, and we’re going to look at one powerful example.
First, we need to understand the profile of retirees who might be good candidates to reduce the taxes on their Social Security with this strategy. If you show a moderate to low income on your tax return and you are generating a lot of interest and dividends from investments where you don’t need that investment income, you may be able to lower your federal tax bill.
Social Security tax triggers
We start by looking at the basic formula from the Internal Revenue Service that determines how much tax you pay on your Social Security. This is called the Provisional Income Formula. You take your modified adjusted gross income, add half of your Social Security and add all of your tax-exempt interest. This total is your provisional income.
From just $107.88 $24.99 for Kiplinger Personal Finance
Become a smarter, better informed investor. Subscribe from just $107.88 $24.99, plus get up to 4 Special Issues
Sign up for Kiplinger’s Free Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As this provisional income gets lower, you pay less tax on your Social Security.
For example, if you’re married, filing a joint return and your provisional income is under $32,000, there’s no tax on your Social Security. If it’s between $32,000 and $44,000, then up to 50% of your Social Security can be taxed. If it’s over $44,000, then up to 85% of your Social Security becomes taxable.
The important key to reducing this tax is to eliminate or shelter the interest and dividends on your tax return from investments that are making your provisional income number higher.
How one couple could cut their tax bill
To use a simple illustration, let’s say a 67-year-old couple has provisional income under $32,000. At or below this number, there is no tax on their Social Security.
Let’s assume they get an inheritance from the wife’s mother, and the income on the inherited investments causes their provisional income to go over $44,000, subjecting them to a tax on up to 85% of their Social Security.
Their goal would be to shelter or eliminate the investment income they’re not using to bring their provisional income down. This, in turn, would reduce the tax they pay on their Social Security. Here are three ways they could do that:
- First, the couple could reallocate some of the investment money into retirement accounts, if one or both of the spouses have earned income and they qualify. This could be either an IRA or, perhaps, a small-business retirement plan like a SEP, which would immediately shelter the investment income from taxes.
- They could also reallocate some of the investments into tax sheltered annuities, which would shelter the investment income from taxes.
- Finally, it might be possible to switch some of the investment money they don’t need for income into certain types of growth stocks that generate less taxable income.
Each of these three strategies would bring the provisional income down. If it’s low enough, it may either reduce the tax on your Social Security or, even better, eliminate it.
-
The Cost of Leaving Your Money in a Low-Rate AccountWhy parking your cash in low-yield accounts could be costing you, and smarter alternatives that preserve liquidity while boosting returns.
-
I want to sell our beach house to retire now, but my wife wants to keep it.I want to sell the $610K vacation home and retire now, but my wife envisions a beach retirement in 8 years. We asked financial advisers to weigh in.
-
How to Add a Pet Trust to Your Estate PlanAdding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
How to Add a Pet Trust to Your Estate Plan: Don't Leave Your Best Friend to Chance
Adding a pet trust to your estate plan can ensure your pets are properly looked after when you're no longer able to care for them. This is how to go about it.
-
Want to Avoid Leaving Chaos in Your Wake? Don't Leave Behind an Outdated Estate PlanAn outdated or incomplete estate plan could cause confusion for those handling your affairs at a difficult time. This guide highlights what to update and when.
-
I'm a Financial Adviser: This Is Why I Became an Advocate for Fee-Only Financial AdviceCan financial advisers who earn commissions on product sales give clients the best advice? For one professional, changing track was the clear choice.
-
Should You Do Your Own Taxes This Year or Hire a Pro?Taxes Doing your own taxes isn’t easy, and hiring a tax pro isn’t cheap. Here’s a guide to help you figure out whether to tackle the job on your own or hire a professional.
-
I Met With 100-Plus Advisers to Develop This Road Map for Adopting AIFor financial advisers eager to embrace AI but unsure where to start, this road map will help you integrate the right tools and safeguards into your work.
-
The Referral Revolution: How to Grow Your Business With TrustYou can attract ideal clients by focusing on value and leveraging your current relationships to create a referral-based practice.
-
This Is How You Can Land a Job You'll Love"Work How You Are Wired" leads job seekers on a journey of self-discovery that could help them snag the job of their dreams.
-
65 or Older? Cut Your Tax Bill Before the Clock Runs OutThanks to the OBBBA, you may be able to trim your tax bill by as much as $14,000. But you'll need to act soon, as not all of the provisions are permanent.
