Retirement Talk: Minimizing Social Security Taxes
Most workers pay into the Social Security program throughout their career. Many people also pay taxes on part of their Social Security payments in retirement. Here’s how to reduce or avoid taxes on your Social Security benefit.
Stay below the taxable thresholds. Social Security benefits become taxable if the sum of your adjusted gross income, nontaxable interest and half of your Social Security benefit exceeds $25,000 as an individual and $32,000 as a married couple. If these income sources are between $25,000 and $34,000 ($32,000 and $44,000 for couples), income tax will be due on half of your Social Security benefit. Retirees with incomes that top $34,000 ($44,000 for couples) pay income tax on up to 85 percent of their Social Security benefit.
However, you will not have to pay tax on your entire Social Security benefit, regardless of your income. “Many retirees are surprised to find that they have to pay taxes on up to 85 percent of the Social Security benefits they receive,” says Dana Anspach, a certified financial planner and CEO of Sensible Money in Scottsdale, Arizona. “The good news is, no matter what, 15 percent of the Social Security benefits you receive are tax-free.”
Retirees with low incomes or whose only source of income is Social Security generally don’t pay income tax on their Social Security benefit. The average Social Security payment to retired workers was $1,411 in March 2018, or $16,932 for the year, which is considerably below the taxable threshold of $25,000 for an individual. However, some 40 percent of Social Security beneficiaries have to pay federal income tax on part of their benefit, according to the Social Security Administration. The income cutoffs for Social Security taxes are not adjusted for inflation each year, so more retirees will need to pay tax on their Social Security payments over time.