How to Minimize Taxes on Social Security
Many retirees are surprised to find that up to 85% of their Social Security benefits could be taxable. But with the right planning, it's possible to reduce or even eliminate those taxes.
The IRS determines how much of your Social Security is taxable using your provisional income, which includes:
Your adjusted gross income (AGI)
Plus any tax-exempt interest (such as from municipal bonds)
Plus 50% of your annual Social Security benefit
Example:
If your AGI is $20,000, you receive $5,000 in municipal bond interest, and your annual Social Security benefit is $30,000, your provisional income would be $40,000 — putting you in the 50% taxable range if you file your taxes married filing joint.
Based on this calculation, here are the income thresholds that determine how much of your benefit is taxable:
Single filers
$25,000 to $34,000 in provisional income: up to 50% of benefits may be taxable
Over $34,000: up to 85% may be taxable
Married filing jointly
$32,000 to $44,000 in provisional income: up to 50% of benefits may be taxable
Over $44,000: up to 85% may be taxable
Note: This doesn’t mean your benefits are taxed at 85%. Rather, it means up to 85% of your benefit amount is included in your taxable income and taxed at your ordinary income tax rate.
Strategies to Reduce or Eliminate Social Security Taxes
1. Delay Taking Social Security
Delaying benefits until age 70 not only increases your monthly payout, but also creates an income “gap window” where you can take advantage of other planning opportunities — such as Roth conversions — before your benefit starts impacting your tax return.
2. Draw Down Pre-Tax Assets Before Claiming
In the early years of retirement, before beginning Social Security, consider withdrawing from traditional IRAs or 401(k)s. These distributions are taxable now, but doing so may reduce your future required minimum distributions (RMDs), which in turn lowers taxable income once you begin collecting Social Security.
3. Consider Roth Conversions
Similar to item 2, Roth conversions allow you to shift money from a traditional IRA to a Roth IRA, paying tax now in order to avoid higher taxes later. By shifting money from a Traditioanl IRA to a Roth IRA prior to starting your social security benefit, it may keep you in lower tax brackets in future years especially when RMDs (requirement minimum distribution) begin at age 73 or 75. Also, once in a Roth IRA, future withdrawals are tax-free and do not count toward provisional income — helping keep more of your Social Security sheltered from taxation.
Note: Keep in mind that conversions count as income in the year they’re done — and can impact provisional income temporarily.
4. Use Qualified Charitable Distributions (QCDs)
QCDs allow individuals age 70½ or older to donate up to $100,000 per year directly from an IRA to a qualified charity. These donations count toward your RMD but are excluded from taxable income.
Clarification: The $100,000 QCD limit applies per individual IRA owner — so a married couple could potentially exclude up to $200,000 in charitable distributions if each spouse qualifies.
This is another way to reduce the size of a pre-tax retirement account balance which counts toward the RMD calculation. Also since the QCD counts toward the RMD amount it can reduce your taxable income, potentially making less of your Social Security benefit subject to taxation at the federal level.
Example: Sue is 78 and is required to take RMD from her traditional IRA of $10,000. Sue decides to process a QCD from her IRA sending $10,000 to her church. She has met the RMD requirement but the $10,000 does not represent taxable income to Sue. Sue’s provision income as a single filer is $30,000 making her Social Security benefit 50% taxable. If she did not process the QCD, that would have raised her provisional income to $40,000 making 85% of her social security benefit subject to taxation.
5. Be Cautious With Tax-Free Interest
Although interest from municipal bonds is federally tax-exempt and potentially state income tax, it is included in the provisional income calculation. If your portfolio includes significant tax-free bond income, it could unintentionally push you into the 50% or 85% taxable Social Security range.
Final Thoughts
Social Security is a cornerstone of retirement income, but managing how it’s taxed is just as important as deciding when to claim. The key to minimizing Social Security taxes is planning around when you claim benefits and where your income is coming from. Strategies like Roth conversions, QCDs, and pre-Social Security IRA withdrawals can all work together to help you keep more of your benefits.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
How does the IRS determine how much of my Social Security is taxable?
The IRS uses your “provisional income” to determine taxation, which includes your adjusted gross income (AGI), tax-exempt interest, and 50% of your annual Social Security benefits. Depending on your filing status and total provisional income, up to 50% or 85% of your Social Security benefits may be taxable.
What are the income thresholds for Social Security taxation?
For single filers, provisional income between $25,000 and $34,000 makes up to 50% of benefits taxable, and income above $34,000 makes up to 85% taxable. For married couples filing jointly, the 50% range applies between $32,000 and $44,000, with anything above $44,000 potentially making up to 85% taxable.
Does “85% taxable” mean I pay 85% tax on my benefits?
No. It means that up to 85% of your Social Security benefit is included in your taxable income and taxed at your ordinary income tax rate. You’re not taxed at 85%; rather, that portion is subject to your regular tax bracket.
How can I reduce or avoid taxes on my Social Security benefits?
You can lower taxable income by delaying Social Security, making Roth conversions before claiming benefits, or drawing down pre-tax accounts early in retirement. Using qualified charitable distributions (QCDs) from IRAs after age 70½ can also reduce taxable income and lower how much of your benefit is taxed.
How do Qualified Charitable Distributions (QCDs) affect Social Security taxation?
QCDs let you donate up to $100,000 per year directly from an IRA to a charity, satisfying required minimum distributions (RMDs) without increasing taxable income. By lowering your income, QCDs can reduce the portion of your Social Security benefits subject to tax.
Does tax-free interest from municipal bonds affect Social Security taxation?
Yes. Although municipal bond interest is exempt from federal income tax, it is included in the provisional income formula. Large amounts of tax-free interest can unintentionally increase the taxable portion of your Social Security benefits.
Turning on Social Security Early? Keep Your Final Paystub to Avoid Penalties
Deciding to take Social Security benefits early can be a practical choice for many retirees, but it comes with potential challenges. One major consideration is the earned income penalty, which could reduce your benefits if you’re still earning income over a certain threshold. But there is a flaw in the Social Security system that sometimes incorrectly assesses the earned income penalty. When someone retires, oftentimes their income for the year is already above the $23,400 earned income threshold but very few retirees realize that if their social security benefit is not turned on until after they receive their final paycheck, the earned income penalty will not apply even though social security may attempt to assess the penalty anyways.
The good news? With proper planning and documentation, such as holding onto your final paystub, you can avoid unnecessary penalties and protect your benefits.
If you are planning to retire prior to your social security full retirement age, and you are also planning on turning on your social security benefits as soon as you retire, you have to be aware of a flaw in the social security system that may automatically prompt social security to attempt to assess an earned income penalty error against your social security benefit in the year that you retire.
Social Security Earned Income Penalty
If you elect to begin receiving Social Security benefits prior to your full retirement age, Social Security assesses a penalty against the Social Security benefits that you receive if your earned income exceeds a specific threshold. That limit in 2025 is $23,400. If you have earned income over $23,400, and you file for social security benefits prior to your FRA, social security will assess a penalty equal to $1 for every $2 over the $23,400 threshold.
For example, Scott retires at age 63; his full retirement age for Social Security is 67, but he elects to file for Social Security benefits as soon as he retires. Scott continues to work part-time and makes $35,000. Since Scott’s income is $11,600 over the $23,400 threshold, social security will assess a $5,800 penalty against Scott’s social security benefit in the following year.
Social security does not assess the penalty by requesting a check from Scott, instead, if Scott was receiving $2,000 per month in Social Security, then the following year they would withhold 3 months of social security payments from Scott, totaling $6,000 to cover the penalty, and then Scott’s monthly benefit would resume after the penalty months have been assessed.
Note: Social security does not withhold partial months for the penalty; if $100 is still owed in the penalty and the monthly SS benefit is $2,400, social security will withhold the full $2,400 monthly benefit to assess the final $100 penalty amount owed.
Flaw In Assessment of Social Security Income Penalty
There is a common flaw in the assessment of the Social Security earned income penalty in the year that an individual retires because it’s a common occurrence that prior to an individual actually retiring, they may have already earned more than the $23,400 income threshold with their employer prior to turning on their social security benefits. Will they be doomed and have to pay the SS penalty, or is there a way to appeal the earned income penalty in these cases?
Thankfully, it’s the latter of the two. In the year that you retire, if you stop working and then turn on your social security benefits AFTER you have stopped working, the income earned prior to the month that you turned on your social security benefits is ignored for purposes of the social security earned income penalty.
For example, Jen, age 64, works for ABC Company from January – May, and then fully retires May 30, 2025. Between January – May, Jen had a W-2 income of $40,000, well above the $23,400 SS earned income threshold. However, since Jen did not turn on her social security benefits until June, after she had received her final paycheck from ABC Company, the $40,000 in W-2 that she earned prior to turning on her SS does not count toward the $23,400 income penalty threshold.
However, here is the flaw. Social Security has no idea when Jen stopped working during the year. All social security knows is that Jen turned on her social security prior to her full retirement age, and according to her tax return filed in that year, her earned income was over the $23,400 threshold. Due to this flaw, we coach clients by saying, “expect social security to attempt to assess the earned income penalty, but keep your final pay stub which shows the date of your final payroll and the total W-2 amount, which should be the amount of earned income that was reported on your tax return”. It may also be helpful to obtain a letter from your employer verifying your final date of employment and the total W-2 income earned at the time of separation from service.
Individuals Who Retire but Then Work Part-time
There are situations where individuals retire from their primary career, turn on Social Security after receiving their final paycheck, but then later in that calendar year they work part-time or start a business that produces income. There is a special assessment of the Social Security earned income penalty for these individuals. The income earned prior to turning on their social security benefit is still ignored, but assuming that their income exceeds the $23,400 threshold before they retire, social security allows these individuals to continue to collect their social security benefit without penalty as long as:
Their monthly income received does not exceed $1,950 ($23,400 divided by 12 months) …..AND
The individual did not perform substantial services in self-employment. The definition of substantial services means devoting more than 45 hours a MONTH to the business or between 15 – 45 hours to a business in a highly skilled occupation.
Exceeding either of the thresholds listed above will trigger the penalty.
Full Retirement Age – No Income Limits
Once you have reached FRA (full retirement age) for Social Security, the earned income penalty no longer applies. You can then earn as much as you want in earned income, and the Social Security earned income penalty will not apply.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
Frequently Asked Questions (FAQs):
What is the Social Security earned income penalty?
If you begin receiving Social Security benefits before reaching your full retirement age (FRA) and continue to earn income from work, the Social Security Administration may reduce your benefit. In 2025, the income limit is $23,400. For every $2 you earn above that amount, $1 of your Social Security benefits is withheld.
How does Social Security apply the penalty?
Social Security doesn’t send you a bill. Instead, it withholds full months of future benefit payments until the penalty amount is repaid. For example, if your penalty is $5,800 and your monthly benefit is $2,000, Social Security would withhold three full months of benefits ($6,000 total).
What happens if I retire mid-year and already earned more than the limit?
If you stop working and turn on your Social Security benefits after retirement, your earnings from earlier in the same year do not count toward the $23,400 limit. However, because Social Security’s system doesn’t automatically know when you stopped working, it may incorrectly assess a penalty.
How can I appeal an incorrect earned income penalty?
Keep your final pay stub showing your last paycheck date and total W-2 income, and ask your former employer for a letter verifying your final date of employment. You can use these documents to appeal the penalty and demonstrate that your income occurred before you began receiving benefits.
Can I work part-time after turning on Social Security before full retirement age?
Yes, but limits still apply. As long as you earn less than $1,950 per month (the monthly equivalent of $23,400 per year) and do not perform “substantial services” in self-employment (more than 45 hours per month, or 15–45 hours in a highly skilled field), your benefits will not be reduced.
What happens once I reach full retirement age (FRA)?
Once you reach FRA, the earned income penalty no longer applies. You can earn as much income as you want without any reduction in your Social Security benefits.
Why is the earned income penalty considered a flaw?
The flaw arises because Social Security’s system uses annual income data from tax filings without knowing when during the year the income was earned. This often causes the system to mistakenly flag retirees who stopped working mid-year as exceeding the income limit, even when they are not subject to the penalty.
