How can I avoid paying taxes on Social Security?

1 min read by Unbiased team Last updated October 4, 2024

Get relevant, up-to-date information about how to reduce or avoid paying taxes on Social Security benefits.

How are Social Security benefits taxed? 

To avoid paying taxes on Social Security benefits, you need to know how taxation works and what income is taxable.  

Social Security benefits can be partially taxable based on your provisional income, which includes all your taxable income, non-taxable interest, and half of your benefits.  

Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program limits the amount of earnings subject to taxation for a given year, which stands at $168,600 for 2024.  

The OASDI tax rate for wages paid in 2024 is set by statute at 6.2% t for employees and employers. So, an individual with wages equal to or larger than $168,600 would contribute $10,453.20 to the OASDI program in 2024. 

The tax thresholds that determine how much of your Social Security benefits are taxable vary depending on your filing status: 

Single filers: 

No tax if provisional income is under $25,000 

Up to 50% of benefits taxed if income is between $25,000 and $34,000 

Up to 85% of benefits are taxed if income is over $34,000 

Married filing jointly: 

No tax if provisional income is under $32,000 

Up to 50% of benefits taxed if income is between $32,000 and $44,000 

Up to 85% of benefits are taxed if income is over $44,000 

Can I keep my income below taxable thresholds? 

There are strategies that you can utilize to reduce your income below the taxable thresholds and avoid paying taxes on Social Security benefits.  

These include considering converting funds from traditional IRAs to Roth IRAs during the years when your income is lower, delaying claiming your Social Security until you’re at full retirement age or beyond, or making qualified charitable distributions. However, this is only possible once you’re over 70 and a half. 

Let’s take a closer look at the impact of various kinds of income: 

  • Self-employment and wage-based income are included in your adjusted gross income. 

  • Interest income is included in the adjusted gross income. 

  • Dividend income is taxed at a lower rate than normal income but is still included in your AGI. 

  • Your 401(k) and traditional IRA are included in your AGI. 

Can I utilize tax-efficient withdrawals? 

It’s possible to make use of tax-efficient withdrawals to minimize or avoid paying taxes on Social Security benefits.  

This includes taking systematic withdrawals from your traditional IRAs and 401(k) before reaching the age of 73 when the required minimum distributions (RMD) start. 

Some of the benefits of starting withdrawals before RMDs include: 

  • Portfolio flexibility: Earlier withdrawals give you more breathing room to adjust your investment strategies based on market conditions. 

  • Tax control: Spreading out withdrawals can make it easier to manage your taxable income, allowing you to avoid large jumps in income that may trigger higher taxes.  

Should I invest in Roth IRAs? 

You can expect certain benefits when investing in Roth IRAs, where qualified withdrawals may be subject to Social Security tax exemption.  

These include: 

  • Tax-free withdrawals in retirement. 

  • Withdrawals do not increase provisional income, potentially reducing taxes. 

  • No required minimum distributions during the owner's lifetime. 

  • Provides tax diversification alongside traditional IRAs. 

You can also convert existing retirement accounts to Roth IRAs. However, there are potential tax implications of this conversion, as you will have to pay income tax on the sum that you converted in the year that you made the switch. This tax will vary depending on the income tax bracket you fall under. 

Can I take advantage of tax deductions and credits? 

Reducing your taxable income is a smart way to potentially lower or ensure Social Security tax exemption.  

Here's how you can do it: 

  • Standard deduction: This is a set amount you can deduct from your income, and the amount varies based on your filing status. 

  • Itemized deductions: If you have significant eligible expenses like mortgage interest, medical bills, or charitable donations, itemizing might offer greater tax savings than the standard deduction. 

  • Take advantage of tax credits: These credits directly reduce your tax bill, dollar for dollar. 

Should I consider state tax implications? 

State taxes can significantly impact your retirement income, particularly if you rely on Social Security benefits.  

Living in a state that doesn't tax these benefits can be a major financial advantage, offering increased disposable income. Learning local tax laws may help if you want to know how to save taxes in retirement.  

As of 2024, 41 states and the District of Columbia do not tax Social Security benefits. Many of these states also offer low costs of living and a good quality of life, making them ideal options for relocation if you want to avoid Social Security tax.  

These states are as follows: 

  • Alabama 

  • Alaska 

  • Arizona 

  • Arkansas 

  • California 

  • Delaware 

  • Florida 

  • Georgia 

  • Hawaii 

  • Idaho 

  • Illinois 

  • Indiana 

  • Iowa 

  • Kentucky 

  • Louisiana 

  • Maine 

  • Maryland 

  • Massachusetts 

  • Michigan 

  • Mississippi 

  • Missouri 

  • Nebraska 

  • Nevada 

  • New Hampshire 

  • New Jersey 

  • New York 

  • North Carolina 

  • North Dakota 

  • Ohio 

  • Oklahoma 

  • Oregon 

  • Pennsylvania 

  • South Carolina 

  • South Dakota 

  • Tennessee 

  • Texas 

  • Virginia 

  • Washington 

  • Wisconsin 

  • Washington, D.C. 

  • Wyoming 

Should I plan with a tax professional? 

Seeking professional guidance is crucial for creating a comprehensive tax strategy that will help you achieve Social Security tax exemption.  

Tax professionals can help you navigate complex tax laws and ensure you're utilizing all available deductions and credits.  

Financial advisors can help develop a retirement income plan that minimizes taxes and maximizes your income by optimizing withdrawal strategies and investment portfolios. 

Get expert financial advice 

Understanding the intricacies of Social Security tax can be complex, but with the right strategies, you can optimize your retirement income and potentially minimize your tax burden.  

If you’ve ever wondered, “How can I avoid paying taxes on Social Security benefits?” you can use methods such as strategically managing retirement withdrawals, optimizing investment choices, and utilizing tax deductions and credits. 

Connect with a qualified SEC-regulated financial advisor through Unbiased to receive personalized advice tailored to your specific needs and goals.  

Writers

Unbiased team

Our team of writers, who have decades of experience writing about personal finance, including investing and retirement, are here to help you find out what you must know about life’s biggest financial decisions.