Why up to 85% of Social Security may be taxable

When it comes to Social Security benefits, many retirees are surprised to learn that up to 85% of their benefits could be subject to federal income tax. The good news? With proactive tax planning, you can reduce or even avoid these taxes altogether.

Why Are Social Security Benefits Taxed?

Social Security benefits were not always taxed. However, as retirement income sources have diversified over the years, the government introduced taxation on benefits for higher-income retirees. Understanding how this works is essential to keeping more of your money.

The IRS calculates your “combined income” to determine if your benefits are taxable. Combined income includes your adjusted gross income (AGI), non-taxable interest (such as municipal bond income), and half of your Social Security benefits. If this combined income exceeds certain thresholds, a portion of your Social Security benefits will be taxable.

What Are the Tax Thresholds?

The IRS has established thresholds to determine whether your Social Security benefits will be taxed. For single filers, if your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxed. If it exceeds $34,000, up to 85% of your benefits may be taxed. For married couples filing jointly, combined incomes between $32,000 and $44,000 mean up to 50% of benefits could be taxable, while incomes above $44,000 could result in up to 85% being taxed.

How Tax Planning Can Help

Fortunately, strategic tax planning can reduce your tax burden. Here are some key strategies to consider:

Manage Your Withdrawals Wisely

Delaying Social Security benefits until age 70 can increase your monthly payments and potentially reduce the portion of your benefits that are taxable in earlier retirement years. Additionally, converting traditional IRA funds to a Roth IRA can help since withdrawals from Roth accounts do not count toward your combined income.

Strategize Investment Income

Focus on tax-efficient investments to reduce taxable income. For example, municipal bonds generate interest that is not included in your combined income calculation. Selling investments strategically to balance capital gains and losses can also help minimize your tax exposure.

Coordinate Income Sources

Drawing down taxable accounts first and balancing income between taxable and tax-free sources can keep your combined income below key thresholds, reducing the amount of taxable Social Security benefits.

Work with a Financial Advisor

A financial advisor can evaluate your unique situation and recommend strategies to maximize your income while minimizing taxes. Tax laws are complex, but working with a professional ensures you’re not leaving money on the table.

An Example of Tax Planning in Action

Let’s take a look at how tax planning can make a difference for a hypothetical couple, John and Sarah. They currently have a combined income of $65,000, which means 85% of their Social Security benefits are taxable. After implementing tax planning strategies such as Roth conversions and better investment coordination, they lower their combined income to $55,000. As a result, only 50% of their benefits are taxable, saving them thousands of dollars annually.

The Cost of Ignoring Tax Planning

Failing to plan for Social Security taxes can significantly reduce your retirement income. Retirees who don’t understand how their benefits are taxed often pay more than necessary. By working with a financial advisor, you can ensure you stay under key thresholds, align withdrawals with tax-efficient strategies, and avoid unnecessary tax burdens.

Additional Ways to Lower Taxes on Social Security

Consider donating directly from an IRA using a Qualified Charitable Distribution (QCD) to keep withdrawals off your taxable income. Using Health Savings Account (HSA) funds for medical expenses can also reduce taxable withdrawals. For some, reviewing your filing status might provide unexpected tax advantages.

Ready to Take Control of Your Taxes?

Tax planning is not just about reducing your tax bill—it’s about maximizing your retirement income. At Guerra Wealth, we specialize in helping retirees navigate these complexities. Our team can create a personalized plan tailored to your specific goals and financial situation.

Why Choose Us?

Our advisors understand the intricacies of Social Security taxation and take a comprehensive approach to consider all aspects of your financial life. We’ll help you implement proactive strategies to protect your income for the long term.

Take Action Today

Don’t let taxes erode your hard-earned Social Security benefits. Schedule a complimentary consultation with one of our financial advisors to learn how tax planning can safeguard your retirement income. The sooner you start, the more options you’ll have to protect your finances.

Final Thoughts

Up to 85% of Social Security benefits may be taxed, but you don’t have to navigate this alone. With the right strategies, you can reduce—or even eliminate—taxes on your benefits. Partnering with Guerra Wealth ensures you have a knowledgeable team on your side, guiding you through every step of your retirement journey.

Let’s Work Together

Contact us today to get started on a personalized tax plan that helps you keep more of your money where it belongs: in your pocket.