How To Lower Your Social Security Tax Bill

If you happen to receive Social Security benefits and have a combined income between $25,000 and $34,000 ($32,000 to $44,000 for couples), up to 50% of your SS benefits can get taxed. If your combined income is higher than that, your benefits might get taxed up to 85%! While this may sound harsh, the fact that the federal government views your benefits as income means that you have options available to you. The most obvious choice is to talk to one of the best tax relief companies, of course, but you can make several adjustments on your own. In this article, we will show you 5 ways in which you can lower your social security tax bill.

5 ways to lower your social security tax bill

While reducing your social security tax bill will usually depend on your specific circumstances, there are a couple of ways that almost anyone can utilize. If you want to lower your SS tax bill, you will want to do the following:

  1. Donate RMDs to charity
  2. Make tax-deductible contributions
  3. Withdraw money from tax-free retirement accounts
  4. Defer work income into another year
  5. Create a tax-efficient investment portfolio
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You have numerous options when it comes to lowering your Social Security tax bill.

Ideally, you will want to stay below the taxable thresholds in order to reduce your tax bill. This means that you will want to manage your other retirement income sources, factor in state taxes, and perhaps set up social security tax withholding. You will want to do the latter mostly to avoid IRS penalties by making sure that you always pay the taxes on time.

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Now, let’s take a look at some of the most popular options to lower your social security tax bill.

Donating RMDs to charity

The best option you have at your disposal, given that you have reached an age where you need to take RMDs (Required Minimum Distributions) from your retirement account, is to donate your benefits to charity. Understanding how qualified charitable distributions for retirees work will enable you to considerably lower your income and, therefore, your taxes. Do note that you need to donate the money to charity by Dec. 31 of each tax year, or it will not count against your taxes. Another thing to consider is that if you want to make the RMD donation from a 401(k) or a traditional IRA account, you will have to transfer the money directly from the account to the receiving charity.

This strategy is best utilized by people who are forced to take money from their IRA when they don’t actually need it. The RMDs can push your income into the next taxable bracket, making you pay far more on taxes than you need to.

box that says "donate" on it
Donating your RMDs to charity is a great way to lower your AGI.

Utilizing IRA and HSA contributions

For people that have a job-based retirement plan such as 401(k), one of the best ways to lower your AGI (Adjusted Gross Income) is to fully utilize IRA contributions. Depending on your situation, contributions to your IRA can even be fully tax-deductible. Do note, however, that there are limits to these contributions. If you are over the age of 50, you can contribute up to $7,500 for the tax year of 2023.

Aside from IRA contributions, you may have the option to contribute to your HSA (Health Savings Account), with similar benefits. Contributing to either IRA or HSA can provide you with a way to reduce your taxable income and your contributions are usually tax-deductible. In fact, IRA/HSA contributions are one of the most popular tax deductions for U.S. taxpayers. That said, since the U.S. tax code is incredibly complicated, you may want to talk to a tax professional before making any contributions.

Try to withdraw money from tax-free retirement accounts

Another way to lower your social security tax bill is to take IRA or 401(k) withdrawals before claiming Social Security benefits. There are two advantages to this approach. The first advantage is that these withdrawals will lower the balance in your account, thereby reducing the size of any RMDs you will have to take. This will also have the effect of reducing your future AGI.

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The second benefit is that these withdrawals might allow you to delay taking Social Security benefits. This is important due to the fact that the longer it takes to claim your benefits, the higher they become. For every year that you delay claiming the benefits (after the minimum age of 62), your social security payments will increase between 5% and 8%.

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Withdrawing money before you receive Social Security benefits can help your tax situation.

Defer work income into another year

If you happen to receive Social Security benefits but are still earning some money on the side, your taxable income might go “through the roof”. Luckily, you have a few options when it comes to managing your taxable income. You can defer it to another year by sending out invoices after Dec. 31, or you can pull some of the business expenses from the next tax year into this one. Another way to cut your tax bills is to simply work less. If you notice that your income is closing into the next bracket, you may want to stop working for a while as crossing the threshold might invalidate most of your work.

Creating a tax-efficient investment portfolio

If you have numerous assets that generate income (stocks, bonds, real estate investment trusts, etc.), all of them will increase the tax on your Social Security Benefits. If you want to minimize the hit, you will want to connect most of your investments into tax-deferred accounts such as 401(k)s and IRAs. Furthermore, you will want to utilize growth stocks more, as they only generate capital gain once you sell them. Moreover, these gains are usually taxed far more preferably than your standard income. For example, if your income is below $44,625, you will need to pay no taxes on selling your growth stocks!

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If you are looking for even more ways to lower your social security tax bill and to efficiently manage your taxes, the best thing to do is browse and explore the Consumer Opinion Guide. Our expert tax articles will provide you with all the information you may need on reducing your overall tax bill.

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