6 Ways To Avoid Social Security Taxes
Written by
Laura Bogart
Edited by
Ashleigh Ray
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Taxes are an inevitable part of life. And unfortunately, the things that you can be taxed on might often pop out of nowhere to surprise you. Even your Social Security earnings can be taxed, under certain circumstances.
According to the Social Security Administration website, about 40% of people who receive Social Security benefits can expect to pay federal taxes on them: “This usually happens if you have other substantial income in addition to your benefits. Substantial income includes wages, earnings from self-employment, interest, dividends and other taxable income that must be reported on your tax return.”
If the prospect of paying Social Security taxes puts strain on your golden years, there are a few moves you can make to avoid, or ameliorate, the burden of taxes on Social Security. GOBankingRates connected with experts to give you some general advice.
If Your Only Income Is From Social Security
Should you find yourself in the position where the only income you have comes from your Social Security check, you can avoid paying taxes on it, explained Russell E. Gaiser III, MBA, CFP, CSSCS and co-founder and retirement income planner at Income Plan HQ.
“The IRS uses the provisional income formula to determine how much of your Social Security income is taxable and essentially, the more income you have from other sources, the more taxable your Social Security becomes,” he said.
If You Use a Roth IRA
Gaiser added that the only other source of income that doesn’t impact taxation of your Social Security is Roth IRA distributions. Since distributions during retirement are tax-free, your Roth IRA income doesn’t count toward your retirement income.
You Look Into a C-Corp
As the founder of the The Ecommerce Accountants, Chris Rivera has seen some effective financial strategies. When it comes to Social Security benefits and taxation, one of the smartest strategies he’s seen for entrepreneurs and business owners involves setting up a U.S. C-Corporation.
“Essentially the individuals receiving Social Security benefits would establish a U.S. C-Corporation using a “blocker corporation” approach,” he said. “This allows the C-Corp to generate income that does not pass through to the individual owner, thereby not affecting their combined income calculations for Social Security taxability.”
Move To a State Without Social Security Taxes
Beyond federal taxes on Social Security, several states also tax Social Security benefits. If you’re a resident of one of those states — including Colorado, Connecticut, Kansas, Minnesota, Montana, New Mexico, Rhode Island, Utah, Vermont and West Virginia — you might want to consider packing your bags and loading up the U-Haul.
You Make Strategic Withdrawals From Retirement Accounts
If you’re looking to avoid paying hefty taxes on your Social Security, you should consider withdrawing funds from your traditional IRA or 401(k) accounts before you even start receiving Social Security benefits. Distributions from these traditional accounts are included in your AGI, or adjusted gross income, and can increase your provisional income.
“I’d advise someone who’s determined to avoid these taxes to focus on managing their taxable income in retirement,” said Cliff Ambrose, FRC, founder and wealth manager at Apex Wealth. “This could mean withdrawing from Roth accounts, which don’t count as taxable income, or strategically timing when they take withdrawals from traditional retirement accounts.”
You Get a Good Financial or Tax Advisor
At the end of the day, achieving any financial goal requires expertise — and nobody is better equipped to help you than a qualified, trustworthy financial or tax advisor. If mitigating Social Security taxes is a core goal of yours, you should find a professional who can help you.
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