Social Security benefits are an essential part of retirement income for millions of Americans. Now, there is a possibility that these benefits could be subjected to federal taxation. This has brought out some anxious responses from the retirees.
However, one can lower or even prevent paying taxes on their Social Security income. This can be achieved with careful financial planning. Those with knowledge of tax diversification and Roth IRAs can achieve this task.
Social Security determines one’s retirement benefits based on one’s past earnings. People usually need to collect 40 credits by working and paying social security taxes. There are a few factors that usually determine the weight of your social security check. These factors are your lifetime earnings, the age at which you start receiving benefits, and additional variables like spousal benefits.
When social security payouts began to change in the 1980s, they were tax-free. However, the federal government may impose federal taxes on your social security benefits these days. It usually depends on the person’s income.
The IRS calculates one’s taxable income using a metric known as “combined income.” It is equal to your adjusted gross income + nontaxable interest + half of your Social Security benefits. These taxes differ based on single and married filers, too.
Seniors DO NOT pay taxes on social security, unless their income takes them over the $25,000/$32,000 (single/joint) threshold.
What is that threshold?
It’s easy, you take your yearly income and divide it by 2. If you’re under the amounts above, you don’t pay taxes.
Most… pic.twitter.com/z02KCsMSHZ
— Dittie (@DittiePE) July 31, 2024
For Single filers, if their total income is between $25,000 and $34,000, up to 50% of their benefits could be taxable. If that income exceeds $34,000, up to 85% of their benefits are subject to taxes.
For the married couple filing together, the 50% threshold starts at $32,000. And the 85% level starts at $44,000.
These levels haven’t been updated for inflation in decades; it’s important to understand them because more retirees are subject to taxes each year.
Building assets without tax efficiency is like building a house and installing drafty ass windows. So here’s a Roth IRA 101 thread. Primary bene of a Roth: investment gains can be used TAX-FREE in retirement (after age 59 1/2 provided account has been open for 5 years) pic.twitter.com/rvi7PD7Sc6
— Ayesha Selden, CFP® (@AyeshaSelden) August 6, 2020
Tax-free income in retirement is one of the best strategies to control your tax exposure. For such scenarios, Roth IRAs are particularly beneficial. Eligible withdrawals from a Roth IRA are completely tax-free and do not count toward your total income. Contributions toward a Roth IRA are made with after-tax money.
This implies that you should maintain your combined income low enough that your Social Security benefits are not taxed. And use withdrawals from your ROTH IRA to fund your retirement.
If someone is a high-income person, they will not be allowed to make a direct contribution to a Roth IRA. However, Roth conversion can provide some help.
You can transfer funds from a traditional IRA to a Roth IRA. Then, taxes will be paid on the converted amount in the transfer year. This would still be substantially less than the tax on Social Security.
Timing is very crucial for this conversion. It must be done during lower-income years, such as early retirement, before Social Security begins to pay. During this time, the tax bite will be less on these transfers.
NO TAX ON TIPS.
NO TAX ON SOCIAL SECURITY.
NO TAX ON OVERTIME.
Congress must pass this one big, beautiful bill!! pic.twitter.com/vE3OZ5J9wc
— Rep. Marjorie Taylor Greene🇺🇸 (@RepMTG) April 30, 2025
It is suggested that a financial advisor be kept for such methods. There may be a chance that the Donald Trump‘s administration passes a bill prohibiting tax on Social security. However, one has to wait for this. Right now there is no such provision.
Social Security is a payment they have accrued over decades of labor. The income during all those years was already taxed. Then getting tax on the money you saved after paying taxes is very, of course, very irritating.
In addition to tax techniques, think about other strategies too. One can coordinate spousal claims or postpone benefits to raise their monthly payouts.
These strategies can greatly improve your retirement financial security when combined with astute tax preparation.
