Oct 17, 2024
A magical time of life, retirement also comes with a dubious dose of magical thinking. Yes, you’ll write that memoir (because it will write itself). Of course you’ll drop those 20 pounds (without dropping the donuts). And those Social Security checks? They’re surely secure from the taxman once you hit 65. Or at least 70. Right?
It’s dollars to donuts that your memoir, once you finally pick up a pen, should include a sad story of just how wrong you are.
Advertisement
Yes, Social Security recipients pay taxes — which may seem odd and redundant given all that money taken from your paychecks over the decades. Right now, those deductions equal 6.2% for full-time employees and 12.4% for the self-employed.
Thanks for subscribing!
Read the best of Moneywise in 5 minutes or less.
By signing up, you accept Moneywise Terms of Use, Subscription Agreement, and Privacy Policy.
It makes sense that anyone with a long history of forking over payroll taxes would anticipate a day when your Social Security becomes a tax-free benefit. But other factors contribute to the confusion many retirees experience as they await a time that never arrives.
How Social Security taxation works
While Social Security and retirement accounts work in tandem to ensure a sound retirement, the fact is that they’re apples and oranges financially. That doesn’t stop people from potentially confusing events such as the required minimum distribution (RMD) age — when you must start tapping your accounts, currently 73 — with some imaginary point when Social Security payouts may no longer be taxed. Or just being stunned that these government benefits are taxed at all.
So here’s the straight facts, straight from the Social Security Administration: “You must pay taxes on up to 85% of your Social Security benefits.”
Got that? Age doesn’t matter. You pay up no matter how old or young you are. In fact, 10 states tax Social Security to various degrees: Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia.
There are exceptions on the federal level, but they only apply to those living on a minimal combined income, which includes your adjusted gross income, tax-exempt interest income and half of your Social Security benefits. It must total less than $25,000 (individuals) or $32,000 (married couples).
Generally speaking, those who live on Social Security alone won’t pay taxes, as it’s impossible to pass those thresholds. For 2024 retirees, the maximum monthly benefits ranged from $2,710 (age 62) to $4,873 (age 70).
Advertisement
Must Read
- The ultra-rich use these 5 real estate strategies to build wealth while they sleep — you can start with just $100
- Here’s the average income of Americans by age in 2026. Are you keeping up or falling behind?
- Insurance companies profit most from drivers who auto-renew without shopping around. Comparing 100+ quotes takes 2 minutes and costs nothing
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
Three ways to beat Social Security taxes
Dreaming of a day the IRS will change its mind about taxing your Social Security is not so much magical as delusional thinking. But there are some strategies to expand your benefit and/or reduce your tax burden.
Reduce your gross adjusted income. It’s possible to get below those $25,000 and $32,000 thresholds if you’re creative — legally, of course — in how you approach deductions. If you receive income from a business, now’s the time to increase the number and amount of deductions you take. It’s best to consult an experienced accountant or CPA who knows how to take an aggressive approach while adhering to IRS rules. With your retirement accounts, see if you can minimize your withdrawals, as that money will count as income, too.
Leverage tax-deferred income. This won’t eliminate your Social Security taxes, but it will certainly delay when you have to pay them. Annuities, for example, will not show up on your reportable income. There’s also an obscure IRS document, Form W-4V, that allows you to defer taxes on your Social Security payments. These withholding amounts are available in tiers of 7%, 10%, 12% or 22% from each check. Again, consult a tax professional before you apply these strategies.
Keep reviewing and adjusting your tax strategy. Life doesn’t stop happening just because you’ve retired. All kinds of events can result in changes to your tax circumstances — for example, when you’re expected to start making RMDs, they may push you into a new income bracket. It’s important to check in periodically with your strategy and make adjustments if needed.
You May Also Like
- JP Morgan sees gold hitting $6,000/oz before 2027 — and a Gold IRA lets you hold the physical metal while deferring the tax bill. Get your free guide from Priority Gold
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Thanks to Jeff Bezos, you can now become a landlord for as little as $100 — and no, you don't have to deal with tenants or fix freezers. Here's how
- Millionaires under 43 are reshaping investing — just 25% of their portfolios are in stocks. Here’s where their money is going
Lou Carlozo is a freelance contributor to Moneywise.
