How can I avoid paying taxes on Social Security?
Introduction
If you exceed the income threshold for your filing status, then you’ll be required to file a tax return. This means that your Social Security benefits may be subject to federal and possibly state income tax.
Keep in mind, though, that there are ways to legally minimize or eliminate tax liability for your Social Security income. To navigate this process, it’s generally recommended that you consult a tax professional to ensure that you’re operating within the law when making these decisions.
The simplest way to avoid paying taxes on your Social Security is to take steps so that your gross income is lower than the point at which you have to file a tax return. This income threshold will vary depending on your filing status.
As far as how you can reduce your gross income, you might consider minimizing the amounts you withdraw from retirement accounts. Additionally, try to prioritize taking money out of tax-free retirement accounts before anything else.
Here are some other tips seniors may use to reduce taxable income in order to minimize taxes paid on Social Security:
- Tax-loss harvesting: This is a strategy where you sell investments at a loss in order to reduce your total taxable income. Note that tax-loss harvesting only works when you take losses on taxable investments.
- Investing in growth stocks: Certain investments and assets will pay dividends and increase your taxable income. Growth stocks, on the other hand, often do not pay dividends and therefore aren’t taxed until you sell, so you can maintain more control over what your taxable income will be for a given year.
- Donate to charity via your IRA: When you make a qualified charitable contribution directly from your IRA to an eligible charitable organization, you can lower your tax burden. If you’re forced to take a required minimum distribution (RMD), this could be one strategy to lower your taxable income.
What is the tax credit for seniors?
Even if you must file a tax return, there are ways you can reduce the amount of tax you have to pay on your taxable income. As long as you are at least 65 years old and your income from sources other than Social Security isn’t high, then the tax credit for the elderly or disabled can reduce your tax bill on a dollar-for-dollar basis.
