How to avoid paying taxes on Social Security income

Yes, it’s possible to avoid paying taxes on your Social Security income, but it requires some careful maneuvering. While avoiding taxes on your monthly benefit check may sound like a good thing, retirees and other beneficiaries may want to think twice before trying to make it happen.

Here’s how the experts say you can avoid taxes on Social Security, why you might not want to and what taxes you may end up paying on your monthly benefit check.

How much of your Social Security is taxable?

It’s possible – and perfectly legal – to avoid paying taxes on your Social Security check.

But here’s the caveat: To receive tax-free Social Security, your annual combined, or provisional, income must be under certain thresholds:

• $25,000, if you’re filing as an individual
• $32,000, if you’re married filing jointly

For married couples filing separately, the IRS begins taxing your Social Security benefits at the following thresholds:

• $25,000 if you’re married filing separately and lived apart from your spouse for the entire year.
• $0 if you’re married filing separately and lived with your spouse at any time during the year.

Your combined income consists of three parts:

• Your adjusted gross income, not including Social Security income
• Tax-exempt interest
• 50 percent of your Social Security income

Add those amounts up, and if you’re under the threshold for your filing status, you won’t pay federal taxes on your benefit.

Even if you’re above this threshold, however, you won’t pay tax on your full benefit. You’ll pay taxes on either 50 percent or 85 percent of your benefit, depending on your combined income.

• For individual filers:
  • Combined income between $25,000 and $34,000, then up to 50 percent of your benefit is taxable
  • Combined income above $34,000, then up to 85 percent of your benefit is taxable
• For married filing jointly:
  • Combined income between $32,000 and $44,000, then up to 50 percent of your benefit is taxable
  • Combined income above $44,000, then up to 85 percent of your benefit is taxable
• For married filing separately:
  • If you lived apart from your spouse the entire year and your combined income is between $25,000 and $34,000, then 50 percent of your benefit is taxable.
  • If you lived apart from your spouse the entire year and your combined income is above $34,000, then 85 percent of your benefit is taxable.
  • If you lived with your spouse at any time during the year, up to 85 percent of your benefits are taxable, regardless of your combined income.

At the end of each year, the Social Security Administration will send you a benefit statement showing what you received during the year. You can use that to figure out how much of your benefit is taxable and what you might need to do to minimize your taxable income in the year ahead. Here’s how your Social Security benefits are calculated.

Of course, with Social Security benefits rising 3.2 percent in 2024 and a further 2.5 percent in 2025 while those tax-free thresholds stay the same, it’s even harder to avoid paying taxes on your benefit checks.

How to minimize taxes on your Social Security

If your Social Security benefit is relatively fixed, albeit with annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. Of course, the availability of these options depends on each individual’s financial situation. For some, they may have more tax-exempt interest that can be reduced while others have less, leaving them one option of reducing their adjusted gross income.

“Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security,” says Kelly Crane, senior vice president and financial advisor at Wealth Enhancement Group in St. Helena, California.

Here are a few ways to reduce your adjusted gross income to get into the tax-free zone:

1. Move income-generating assets into an IRA

Most retirees are looking to pull money from their IRAs rather than put it in, but one way to reduce your income is to put income-generating assets into your IRA, where interest or dividends won’t count immediately as income.

This strategy doesn’t mean you necessarily put new money into an IRA – which might not be possible if you’re not working – but rather sell income-producing assets in taxable accounts and buy them in the tax-advantaged shelter of an IRA. At the same time you may be able to shift assets such as growth stocks into taxable accounts, where gains won’t be taxable until the asset is sold.

For example, if you have a bond in a taxable account and a growth stock in an IRA, you could sell those and then buy the bond in the IRA and the stock in the taxable account. You’ll reduce your taxable income without reducing your total income.

That said, if you make the switch, you’ll want to be sure you’re not incurring any unnecessary capital gains taxes in your taxable account, defeating the purpose of the switch.

2. Reduce business income

If you’re receiving partnership income or other business income, see if you can minimize it.

“Reduce any K-1 or pass-through income from a business by increasing business deductions or expenses,” says Crane.

This strategy might not be possible every year, but you could also consider bunching your deductions and expenses into alternating years, so that your Social Security income is taxable every other year. Consult with a tax professional to be sure you’re following tax laws.

3. Minimize withdrawals from your retirement plans

Money that you pull from your traditional IRA or traditional 401(k) will count as income in the year you withdraw it and increase your adjusted gross income. If you can minimize those withdrawals, or even not withdraw that money at all, it will help you get close to the tax-free threshold. Of course, this may not be possible if you’re forced to take a required minimum distribution (RMD) that pushes you over the edge.

If you’re not forced to take an RMD in a given year, consider taking money from your Roth IRA or Roth 401(k) instead and avoid generating taxable income.

4. Donate your required minimum distribution

If you can’t wiggle out of taking your RMD from a traditional IRA, then consider donating it to charity to get into the tax-free zone. The donation could allow you to deduct the amount from your adjusted gross income. But in order to be qualified, you’ll have to be eligible for the qualified charitable distribution rule, including being over age 70 ½, and pay the distribution directly from the IRA to the charity. The amount donated cannot be over $100,000 a year.

That’s a strategy that Crane suggests, though he acknowledges that some people will have too much income and simply won’t be able to lower their adjusted gross income.

5. Make sure you’re taking your maximum capital loss

If you’ve invested in stocks or bonds and have a loss on paper, you might want to sell and realize that loss so you can claim it as a tax deduction. The process is called tax-loss harvesting, and it can net you a sizable deduction from your income.

The tax code allows you to write off up to a net $3,000 each year in investment losses. A write-off first reduces any other capital gains that you’ve incurred throughout the year. For example, if you have a $3,000 gain on one asset but a $6,000 loss on another, you can claim a deduction for the full $3,000 net loss.

Any net loss beyond that $3,000 has to be carried forward to future years, at which point it can be used. And even if you can’t realize the full value of that net loss, it can still make sense to realize some loss, especially if it pushes your Social Security benefit into the tax-free area.

Tax-loss harvesting works only in taxable accounts, not special tax-advantaged accounts such as an IRA or 401(k).

Other things to watch out for

While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, it’s important that you keep things in perspective.

“Tax strategy should be part of your overall financial planning,” says Crane. “Don’t let tax strategy be the tail that wags the dog.”

In other words, make the financial moves that maximize your after-tax income, but don’t make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.

And it could be financially smart to first avoid some of the biggest Social Security blunders.

Don’t forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so it’s important to investigate how your state treats Social Security.

“There really aren’t any tricks, you just have to be careful with your interest and dividends,” says Paul Miller, CPA, of Miller & Company in the New York City area.

Bottom line

While the idea of tax-free Social Security is nice – and about 60 percent of people do avoid federal taxes on their benefit check – the cost of that is having an income that’s under a relatively low threshold.

If you can make some sensible changes to how you realize income, then aiming for tax-free Social Security could make sense. But for many others, it would require a massive overhaul of their lifestyle or is otherwise simply impossible given their income and assets.

— Bankrate’s Rachel Christian contributed to an update of this story.