Is Social Security taxed?
It didn’t used to be — but now it may be for people with higher retirement income. The good news is that planning today could allow you to pay less or even no tax on your Social Security benefits.
There was no tax on Social Security before 1985. If you received $3,000 per month in benefits, you kept all of it in your pocket, and Uncle Sam didn’t take a cut. Today, retirees who have been diligent savers may not have that opportunity, due to what’s called a required minimum distribution (RMD).
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RMDs are annual mandatory withdrawals you must take from your tax-deferred accounts. If you find yourself with a significant amount of money saved for retirement, you may end up with higher RMDs — and that income could result in you paying taxes on 85% of your Social Security benefits. Let’s talk through how this works, plus I’ll offer some strategies for paying less or even no taxes on your Social Security income.
What’s your provisional income?
The first thing to understand is that how much of your Social Security benefits are taxed is based on your provisional income. This is made up of four types of income:
- Half of your Social Security benefits. If you receive $40,000 in annual Social Security benefits, then $20,000 counts toward your provisional income.
- Ordinary income. This includes any taxable payments from other sources, such as a pension or tax-deferred withdrawals from an IRA or 401(k).
- Capital gains and dividends. These are non-qualified investments outside your retirement accounts, including proceeds from the sale of a rental property or business.
- Non-taxable interest. Although not as common, some people could receive income from things like municipal bonds, which are not subject to federal income tax but are still included in provisional income calculations for Social Security taxation.
So the formula is: Half of Social Security benefits + ordinary income + capital gains and dividends + non-taxable interest = provisional income.
Start by adding up your provisional income using the formula above, then use the chart below to calculate the percentage of your Social Security benefits that may be taxable. As you’ll see in the chart, if you’re married filing jointly and your provisional income is $32,000 or less, then none of your benefits are subject to tax. However, 85% of your Social Security benefits could be taxable if your provisional income exceeds $44,000 per year.
| Filing Status | Provisional Income | Percentage of Social Security Subject to Tax |
| Single | Under $25,000 | 0% |
| Row 2 - Cell 0 | $25,000 - $34,000 | Up to 50% |
| Row 3 - Cell 0 | Over $34,000 | Up to 85% |
| Married filing jointly | Under $32,000 | 0% |
| Row 5 - Cell 0 | $32,000 - $44,000 | Up to 50% |
| Row 6 - Cell 0 | Over $44,000 | Up to 85% |
Source: IRS
How to reduce your Social Security tax burden
Is there anything you can do to lower your Social Security tax burden? Yes. The key is to show a lower income when you start your benefits. One way to do this is by having more tax-free investments (such as a Roth IRA) so the distributions don’t count toward your provisional income.
Before it’s time to start your Social Security benefits, you might want to consider a Roth conversion. This is where you move money from your IRA or 401(k) into a Roth IRA. Doing this will increase your tax bill now but may lead to significant tax savings over time.
Many people who have been diligent savers think it is unrealistic to have Social Security tax-free and think they always will be forced to have 85% of their Social Security Taxable. However, our clients who have saved more than $1 million in tax-deferred accounts will disagree with that statement. Through proactive tax planning and the use of a Roth conversion, many of them are able to put themselves in a position where they end up paying no tax on their Social Security benefit.
Another strategy for reducing taxes on your Social Security is to wait until age 70 to start benefits. This doesn’t work for everyone’s situation. I tell people all the time that if they can tell me when they are going to pass away, I will tell them when to take Social Security. We simply do not know the best time; however, delaying benefits has the dual effect of reducing your income in your 60s to allow for withdrawals from your investments to be in lower tax brackets while also maximizing your monthly payments when you start benefits.
Finally, the best strategy for addressing future taxes is to implement a plan that’s customized for your unique situation and goals. Seek out an adviser who doesn’t take a cookie-cutter approach to financial planning, but instead has the right resources and expertise to help you make informed decisions. If you do this, you can maximize how much of your Social Security benefits you keep — and minimize how much you owe in taxes.
The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.
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