Social Security Is Taxable? How to Minimize Taxes

For many retirees, Social Security is a crucial component of their retirement income strategy. So is Social Security taxable? Most people can expect to pay taxes on at least some of their benefits—especially if they receive additional revenue from other sources.

The amount depends on your filing status and combined income for the year. Combined income is your adjusted gross income (AGI) without considering Social Security income, plus earnings from nontaxable interest, plus half of your Social Security benefits—and your spouse's if filing a joint return. (AGI generally comprises wages, interest, investments gains, dividends, and taxable distributions from retirement plans, minus certain adjustments to income.)

Unless the combined income reported on your 2025 tax return is less than $25,000 for taxpayers filing single, head of household, qualifying widow or widower (less than $32,000 for married couples filing jointly and $0 for married filing separately but not living apart), a percentage of your Social Security payments will be subject to federal income tax.

If you need to claim Social Security benefits before you reach your full retirement age, you could reduce your benefit by continuing to work, including part time or for yourself. As long as you draw a salary, $1 in benefits will be deducted for every $2 you earn above the annual limit—which is $22,320 for 2024—until the year you reach full retirement age, when the reduction falls to $1 for every $3 above the higher limit of $59,520.

Take note that this reduction is only temporary. The month you reach full retirement age, your payments will be recalculated because the Social Security Administration will credit back the deducted amount due to any excess earnings.

A better approach would be to delay taking Social Security if you don't need the extra funds. For each year you delay once you reach retirement age until age 70, you'll get an 8% bump on your payments, allowing you to rely less on other income sources when you start collecting. In the meantime, you can tap other accounts if you do need cash. Again, before postponing your Social Security, assess your personal circumstances to ensure you'll have the funds to live comfortably. 

Once you reach age 73, you generally need to take annual required minimum distributions (RMDs) from your tax-deferred retirement accounts, such as traditional IRAs and 401(k)s, which are taxed as ordinary income. However, Roth IRAs and Roth 401(k)s do not have RMDs, and you won't pay taxes on withdrawals as long as you're age 59½ or older and it's been at least five years since you initially funded the account.

Converting to a Roth could help lower your tax liability, especially if you think you'll be in a higher tax bracket during retirement. You can open a Roth at any time, but be aware that you'll pay income tax on the converted funds upfront. Before taking action, consider consulting a tax professional or wealth advisor to ensure this strategy fits your financial goals.

Most investments held in a taxable account, like at your brokerage, generate income in the form of interest, dividends, or capital gains. With careful planning, you can employ a few strategies to potentially lessen the annual taxes on such income. For example, shifting some of your assets to tax-efficient investments, such as municipal bonds, tax-exempt mutual funds, or tax-exempt exchange-traded funds, can offer continued growth without increasing taxable income. But remember, although municipal bonds are generally exempt from federal and state income taxes, the IRS includes interest from these bonds to calculate your combined income.

If you need to sell investments, focus on ways to lower your taxes. For example, gains from assets that you've held for more than one year will have a preferred long-term capital gains tax rate of 0%, 15%, or 20%—depending on your income level. You can also potentially minimize taxes on investment income through tax-loss harvesting, where you offset capital gains by selling an underperforming asset.

For those who are charitably inclined, you may be able to offset taxes with a charitable contribution. However, this only works if you itemize your deductions. If you're age 70½ or older, another way to make a donation and potentially reduce your taxes is by making charitable gifts directly from your IRA, known as a qualified charitable contribution (QCD).

A QCD won't provide a tax deduction, but this type of distribution doesn't create taxable income either. And the amount you give may be able to count toward your RMD for the year, assuming you do the QCD before taking all of your RMDs. Each individual can use a QCD to donate up to $108,000 tax-free to a qualified charity in 2025 (the annual QCD limit is indexed for inflation). You can also use up to $54,000 of a QCD to make a one-time donation to a Charitable Remainder Trust (CRT) or Charitable Gift Annuity (CGA) in 2025.

Some investments generate taxable income, while others are nontaxable. For example, the interest income from many bonds is subject to tax. Dividends and interest from savings accounts or other investments also count as taxable income. Interest income on municipal bonds generally is exempt from federal and state income taxes with a few exceptions: Any capital gains distributed may be taxable; income received from muni investments may be subject to the Alternative Minimum Tax for some investors; and interest income from muni bonds is added back as part of your modified adjusted gross income when computing potential tax due on Social Security benefits on modified income of more than $25,000 for individual filers, $32,000 for joint filers.

With a strategy of reallocating investments to include nontaxable income, investors can accept retirement payments that do not count as income, which means they won't add to the income that can trigger taxes on Social Security benefits. By shifting some of your assets to those that favor the types of income that are shielded from taxation, you can still plan for the same amount of retirement income with potentially lower taxes on your Social Security.

If you have outside income and other investments, consider being more aggressive on drawing down those assets early on while delaying taking Social Security. You’ll get a Social Security bump the longer you wait—8% per year until age 70. By then, if you've drawn down other assets (which are likely taxed at a higher rate), there might be fewer of those assets left to tax, which can potentially lower the amount of your Social Security benefits subject to taxation.

Before choosing to delay your Social Security benefits, assess your expected income from all sources and compare them to your expected expenses. This can help ensure you'll have the funds to live comfortably.

Unless congress changes the rules, most retirees will have some portion of their Social Security benefits be taxed. But understanding how your benefits impact your overall retirement income can help you consider strategies for minimizing your overall tax bill. Take care to work with your wealth advisor and a local tax professional to help make sure your retirement income stays on track.