5 ways to avoid paying taxes on your Social Security benefits

The recent federal tax overhaul changed a lot of rules, but one thing remains the same: It is exceedingly difficult to evade the long reach of the tax man.

That’s even true of Social Security benefits. Most people know that if you work while collecting benefits before your full retirement age, it can result in a reduced benefit. But earn too much money — even by simply making withdrawals from some types of retirement plans — and you also can end up paying income taxes on your Social Security benefits.

According to the Social Security Administration

Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).

Whether or not you owe taxes on these benefits depends on your “combined income.” The SSA defines this as the sum of your:

  • Adjusted gross income
  • Nontaxable interest
  • One-half of your Social Security benefits

If you file an individual return and your combined income is between $25,000 and $34,000, you may owe income tax on up to 50 percent of benefits. Earn more than that, and up to 85 percent of your benefits could be subject to taxes.

For those filing a joint return, the income range is between $32,000 and $44,000 for the 50 percent limit. Earn more than that, and the “up to 85 percent” rule kicks in.

Fortunately, there are ways to reduce your income and lower — or even avoid paying — taxes owed on your Social Security benefits. They include:

Consider withdrawing money from a Roth account

If you have socked away money in a 401(k) or traditional IRA, expect Uncle Sam to come calling during your retirement. After years of deferring taxes on those contributions, the bill is due once you begin making withdrawals on the money.

Unfortunately, these withdrawals will likely boost your income. For this reason, withdrawals from a 401(k) or traditional IRA probably put you at the greatest risk of having your Social Security benefits taxed.

One way to avoid such taxation is to withdraw only as much money as the government obligates you to do each year — known as the minimum required distribution — and to take any additional cash that you need from a Roth IRA or Roth 401(k), if you have one. Since no taxes are due on Roth distributions, these withdrawals will not impact your adjusted gross income.

However, there are many good reasons not to withdraw money from a Roth IRA or Roth 401(k) — including the fact that you are not required to take minimum distributions on these accounts. This means you can defer taxes until your death, and even beyond if you leave the money to heirs.

So, consult with a tax professional before making this decision. A pro can help you to decide whether withdrawing money from a Roth account — or making a combination of withdrawals from both a Roth and a traditional 401(k) or IRA account — is the best strategy for you. 

RELATED: Take a look at the average tax refund in every U.S. state: 

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Average tax refund in every U.S. state
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Average tax refund in every U.S. state

Texas

Average refund: $3,206

Number of refunds: 10,087,693

Total income tax refunded: $32.3 billion

Louisiana

Average refund: $3,115

Number of refunds: 1,611,412

Total income tax refunded: $5 billion

Connecticut

Average refund: $3,099

Number of refunds: 1,396,609

Total income tax refunded: $4.3 billion

Oklahoma

Average refund: $3,098

Number of refunds: 1,300,577

Total income tax refunded: $4 billion

New York

Average refund: $3,059

Number of refunds: 7,712,210

Total income tax refunded: $23.6 billion

New Jersey

Average refund: $3,013

Number of refunds: 3,479,321

Total income tax refunded: $10.5 billion

Wyoming

Average refund: $2,989

Number of refunds: 214,649

Total income tax refunded: $641.6 million

North Dakota 

Average refund: $2,983

Number of refunds: 277,422

Total income tax refunded: $827.4 million

Florida

Average refund: $2,933

Number of refunds: 7,854,538

Total income tax refunded: $23 billion

Mississippi

Average refund: $2,922

Number of refunds: 1,018,429

Total income tax refunded: $2.97 billion

California

Average refund: $2,911

Number of refunds: 13,594,703

Total income tax refunded: $39.5 billion

Washington D.C.

Average refund: $2,900

Number of refunds: 277,399

Total income tax refunded: $804.5 million

Illinois

Average refund: $2,900

Number of refunds: 4,973,653

Total income tax refunded: $14.4 billion

Maryland

Average refund: $2,861

Number of refunds: 2,329,288

Total income tax refunded: $6.7 billion

Massachusetts

Average refund: $2,850

Number of refunds: 2,704,250

Total income tax refunded: $7.7 billion

Alaska

Average refund: $2,843

Number of refunds: 276,887

Total income tax refunded: $787 million

Nevada

Average refund: $2,830

Number of refunds: 1,111,952

Total income tax refunded: $3 billion

Georgia

Average refund: $2,832

Number of refunds: 3,606,774

Total income tax refunded: $10.2 billion

Alabama

Average refund: $2,802

Number of refunds: 1,650,125

Total income tax refunded: $4.6 billion

Virginia

Average refund: $2,771

Number of refunds: 3,129,030

Total income tax refunded: $8.7 billion

Arkansas

Average refund: $2,759

Number of refunds: 989,288

Total income tax refunded: $2.7 billion

Tennessee

Average refund: $2,726

Number of refunds: 2,465,816

Total income tax refunded: $6.7 billion

Utah

Average refund: $2,681

Number of refunds: 1,033,141

Total income tax refunded: $2.8 billion

Washington

Average refund: $2,681

Number of refunds: 2,749,362

Total income tax refunded: $7.4 billion

Arizona

Average refund: $2,672

Number of refunds: 2,244,925

Total income tax refunded: $6 billion

Kansas

Average refund: $2,665

Number of refunds: 1,044,275

Total income tax refunded: $2.8 billion

New Mexico 

Average refund: $2,657

Number of refunds: 724,549

Total income tax refunded: $1.9 billion

South Dakota

Average refund: $2,651

Number of refunds: 321,372

Total income tax refunded: $852 million

West Virginia

Average refund: $2,649

Number of refunds: 649,049

Total income tax refunded: $1.7 billion

Kentucky

Average refund: $2,648

Number of refunds: 1,590,274

Total income tax refunded: $4.2 billion

Delaware

Average refund: $2,648

Number of refunds: 365,749

Total income tax refunded: $968.4 million

Rhode Island

Average refund: $2,643

Number of refunds: 436,490

Total income tax refunded: $1.1 billion

Pennsylvania

Average refund: $2,643

Number of refunds: 5,071,264

Total income tax refunded: $13.4 billion

Colorado

Average refund: $2,636

Number of refunds: 2,014,233

Total income tax refunded: $5.3 billion

North Carolina

Average refund: $2,629

Number of refunds: 3,580,471

Total income tax refunded: $9.4 billion

Nebraska

Average refund: $2,615

Number of refunds: 711,103

Total income tax refunded: $1.8 billion

Indiana

Average refund: $2,612

Number of refunds: 2,577,994

Total income tax refunded: $6.7 billion

Iowa

Average refund: $2,602

Number of refunds: 1,141,151

Total income tax refunded: $3 billion

New Hampshire

Average refund: $2,602

Number of refunds: 558,359

Total income tax refunded: $1.4 billion

Missouri

Average refund: $2,601

Number of refunds: 2,220,029

Total income tax refunded: $5.7 billion

South Carolina

Average refund: $2,569

Number of refunds: 1,719,299

Total income tax refunded: $4.4 billion

Hawaii

Average refund: $2,564

Number of refunds: 535,763

Total income tax refunded: $1.4 billion

Michigan

Average refund: $2,560

Number of refunds: 3,776,668

Total income tax refunded: $9.7 billion

Ohio

Average refund: $2,517

Number of refunds: 4,570,589

Total income tax refunded: $11.5 billion

Minnesota

Average refund: $2,516

Number of refunds: 2,112,212

Total income tax refunded: $5.3 billion

Idaho

Average refund: $2,457

Number of refunds: 561,133

Total income tax refunded: $1.4 billion

Wisconsin

Average refund: $2,436

Number of refunds: 2,236,886

Total income tax refunded: $5.4 billion

Montana

Average refund: $2,401

Number of refunds: 372,817

Total income tax refunded: $895 million

Oregon

Average refund: $2,398

Number of refunds: 1,431,924

Total income tax refunded: $3.4 billion

Vermont

Average refund: $2,392

Number of refunds: 254,192

Total income tax refunded: $608 million

Maine

Average refund: $2,336

Number of refunds: 509,896

Total income tax refunded: $1.2 billion

Average tax refund by state
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Distribute your RMD to a charity

Giving money to charity is a great way to help make the world a better place. While doing good for others, you can also lower the odds that your Social Security benefit will be taxed.

If you are 70½ or older, you can take up to $100,000 of your annual required minimum distribution, give it to a charity and avoid income taxes on the money. This is known as a qualified charitable distribution. 

Since the money is not taxed, it will not boost your adjusted gross income. But you need to be aware of some key rules.

For starters, the money must be directed to a qualified 501(c)(3) organization.

Also, you cannot use funds from a 401(k) or other employer-sponsored plan to make this type of distribution. There are ways around this — such as rolling over money to an IRA — but again, this strategy should not be used without consulting your tax adviser. 

Think twice about taking a part-time job

Every dollar you earn doing part-time work can push you a little closer to owing taxes on your Social Security benefits. Of course, it’s silly to quit a job you enjoy — or need — simply to trim your tax bill a little.

But if the job is a low-wage pain in the neck that only provides you with a modest financial benefit, you might be better off quitting so that you can reduce your income for the tradeoff of lowering or eliminating taxes on your Social Security benefits.

Perhaps it’s also worth giving up some income — and income taxes — to get more free time. After all, a day on the golf course sure sounds better than greeting people at Walmart.

Reconsider purchasing municipal bonds

A lot of people turn to municipal bonds as a way to lower their tax bill. These types of bonds typically are not subject to federal and state income taxes.

However, municipal bond income is included in the formula that determines whether or not you will pay taxes on your Social Security benefits. As MunicipalBonds.com states:

When it comes to taxing Social Security benefits, tax-free municipal bond interest can become a “stealth tax” that quietly eats away at income. Bondholders should be aware of these potential tax consequences when deciding between tax-free muni bonds and other kinds of fixed-income investments.

Consider consulting with a financial adviser to help you determine whether municipal bond holdings might cause such trouble for you.

Delay collecting your benefits

Choosing to delay collecting Social Security benefits until your full retirement age — or even beyond — might be the simplest way to avoid paying taxes on your Social Security benefits, at least for a while.

Waiting to file for benefits also means you will get a bigger check each month once you finally do start collecting.

For more on the pros and cons of delaying Social Security benefits, check out:

Do you have more tips for sheltering Social Security benefits from taxation? Share them by commenting below or on our Facebook page.

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