Reduce Your Taxes On Social Security With This Generous Tip

Taxes may be a fact of life but that doesn't mean you have to accept paying more than you should on your Social Security. Prior to the 1980s, there were no taxes on Social Security benefits, and even when that changed in 1983, the idea was that it would only tax the highest income earners in the country. A dollar in 1983 isn't the same as a dollar in 2024, and since our lawmakers at the time didn't account for inflation, even those of us who are far from high income earners are on the hook for paying taxes on our benefits today.

Social Security tax is based on a tax filer's combined income, which is your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. For couples filing jointly, if this total is between $32,000 and $44,000, then 50% of their benefits could be taxable. For individuals, this same percentage applies to Social Security benefits if your combined income is between $25,000 and $34,000. As your income rises, whether jointly or as an individual tax filer, so does the amount of your taxable benefits, up to as much as 85% if you make over $34,000 individually or $44,000 jointly to the maximum of $168,000 in 2024. (This rises to $176,100 in 2025.)

While there isn't much you can do about paying those taxes (the Social Security Administration reports about 40% of Social Security recipients pay federal income tax on their benefits), there are ways to reduce the amount of tax you pay on your Social Security benefits; one way is by taking qualified charitable distributions, or QCDs, from your IRA.

Whether you're retired or not, an IRA offers a viable path to reducing taxes on Social Security. It offers the dual benefit of not being considered part of your income, and is free from taxation so long as you don't touch it until retirement. However, for traditional IRAs, which are funded with pretax dollars, the IRS requires you to begin making withdrawals by age 73 – so you don't avoid paying taxes on this pretax income forever. Note, these required minimum distributions, or RMDs, don't apply to Roth IRAs, which are funded with after-tax dollars.

Of course, taking RMDs will increase your total combined income, which might push you into the income range where Social Security benefits become taxable. A workaround to this is by making qualified charitable distributions starting at age 70 ½. Once you're 70 ½ years old, you're allowed to make nontaxable withdrawals for charitable donations up to $100,000. Even better, once you hit age 73 when RMDs are enforced, you can make your charitable contributions part of that to again keep your tax burden lower. This makes an IRA one of the most important tax breaks you need to know where your Social Security is concerned.

This said, you could also convert your traditional IRA into a Roth IRA, which will allow you to withdraw your earnings tax-free once you're 59 ½ years old. You'll need to have had the account open for at least five years before you can draw from it, however, so the caveat here is to start that process well before you retire. The key is that qualified Roth IRA distributions aren't counted as income.

In addition to donating your RMDs, you could also try deducting your stock losses. As previously mentioned, how you file your federal taxes, whether as an individual or jointly as a couple, can have big impacts on how much tax you pay on your Social Security. With the potential for 50% to 85% of your Social Security being eligible for tax, any way you can show a loss on your overall income for the year can't hurt — especially if it's tax deductible. Tax-loss harvesting occurs when you've lost money on stocks or bonds and you sell to claim the loss for a tax deduction. This strategy is one of the few effective ways to avoid paying taxes legally, and can take away some of the bitter sting of losing money on the markets as well.

You're allowed to write off up to $3,000 in losses in a year, which will put you in a lower tax range, perhaps even below the combined income threshold where Social Security gets taxed. Further, you can carry additional losses over to the next year retroactively. While you can't do this with IRAs and 401(k) accounts, it's legal to try this strategy with any traditional taxable account. While your goal shouldn't be to lose money in the markets, it's often an inescapable reality. At least now you know how to offset taxes on your benefits with any potential losses on the market.