I am claiming Social Security for the first time. How can I cut the taxes?

If you’re claiming Social Security for the first time, you’re wise to consider the role taxes will play. The goal is to minimize taxes to the best of your ability, and here, we’ll cover five tips that can help. It pays to strategically consider taxes throughout the year so you don’t have any surprises when it’s time to file. 

1. Know what to expect

It’s important to know that the federal government may tax up to 85% of your Social Security benefits, depending on your overall income.  For example:

Single filers

• No tax on benefits if your combined income is below $25,000.
• Benefits are taxed up to 50% if your combined income is between $25,000 and $34,000.
• Benefits are taxed up to 85% if your combined income is more than $34,000.

Married filing jointly

• No tax on benefits if your combined income is below $32,000.
• Benefits are taxed up to 50% if your combined income is between $32,000 and $44,000.
• Benefits are taxed up to 85% if your combined income is more than $44,000.

Married filing separately

• Up to 85% of your Social Security benefits may be taxable regardless of income if you lived with your spouse at any point of the year.

In addition, if you live in one of the following nine states, your state may tax all or some of your Social Security benefits. State formulas for Social Security taxation vary, so check your state for specifics.

• Colorado
• Connecticut
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont
• West Virginia

Once you know what to expect in terms of taxes, you can focus on keeping them as low as possible.

2. Minimize withdrawals from traditional retirement accounts

Required minimum distributions (RMDs) are not mandatory until you reach age 73 (or 75 if you were born in 1960 or later). If you don’t need earlier withdrawals to cover expenses, consider withdrawing as little as possible. Doing so provides two benefits:

1. You’ll pay less in taxes for that tax year, and
2. The funds you leave in your retirement account will have more time to grow

3. Double down on tax deductions and credits

If it’s been a while since you studied the wide variety of tax deductions and credits available to you at tax time, now is a good time to refamiliarize yourself. What you’re looking for is any available tax deduction or credit that will lower your overall tax liability.  While the standard deduction has increased over the last few years, you may find that itemizing your deductions is still beneficial, especially if you have significant medical expenses or charitable contributions.

4. Defer self-employment income

If you or your spouse continue to run a side hustle or small business  after you’ve begun collecting benefits, think about deferring income to the following year and digging deep into business expense deductions.

Let’s say you have a party planning business and throw a significant event in October or November. Here are a few options to consider:

• Delay invoicing for the party until the new year.
• Contribute a portion of the income to a pre-tax retirement account, such as a SEP IRA or Solo 401(k). Receiving Social Security benefits in no way prohibits you from continuing to build a retirement account.    
• Accelerate expenses by paying for business expenses before the end of the year, thereby reducing your taxable income.

5. Sell underperforming investments

As mentioned, there’s no rule saying you can’t continue to invest, even while receiving Social Security benefits. Because you’re concerned about your tax burden, consider selling underperforming investments to offset capital gains and to (potentially) deduct up to $3,000 in ordinary income.

Even if you’ve always handled investment decisions on your own and feel comfortable with all things retirement-related, you may want to investigate working with a retirement advisor. A retirement advisor is a financial professional specially trained to help you devise a financial plan that can carry you through retirement.  

You’re headed into a sweet period of life. Make the most of it by doing everything you can to enhance your finances – and that begins with saving as much as possible on taxes. 

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