Stop Overpaying on Social Security Taxes. Here's What You Can Do


Senior adult man calculating how much he has paid on Social Security taxes.
Senior adult man calculating how much he has paid on Social Security taxes.

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Millions of Americans rely on Social Security benefits for all, or a portion, of their retirement income. Up to 85% of Social Security benefits are subject to federal income tax, depending on your total household income. However, Fidelity recently presented options for taxpayers to reduce how much they pay in taxes on Social Security benefits. Delaying Social Security claims and reducing withdrawals from traditional IRAs are two popular ways Social Security recipients can lower their tax bills. Some others may also work, depending on your specific situation.

A financial advisor can help you minimize taxes on your Social Security benefits. Speak with an advisor today.

You must pay taxes on Social Security benefits if your combined income exceeds certain thresholds. Social Security uses a figure called combined income to determine whether your income is above the thresholds where owe taxes on benefits. The formula for determining your combined income is:

Combined Income = Adjusted Gross Income (AGI) + Nontaxable Interest + 1/2 of Social Security benefits

Single filers with combined income above $25,000, and married joint filers above $32,000, may pay taxes on up to 85% of those benefits.

While Social Security benefits are subject to taxation, benefits get taxed at a lower rate than other sources of income. A maximum of 85% of Social Security benefits may be taxed, for instance, versus 100% of IRA withdrawals. This makes Social Security a valuable income source for retirees.

If you don’t do anything to manage the way your Social Security benefits are taxed, you may wind up with less after-tax income in retirement that you can use to support your lifestyle. Fidelity breaks down two widely used strategies for doing that:

  1. Roth conversion: If you convert savings into a Roth IRA, you can make tax-free withdrawals from the Roth account without increasing your combined income. This Roth conversion strategy lets you claim Social Security benefits without paying more taxes on them.

  2. Delaying Social Security: While you can claim Social Security benefits as early as age 62, waiting to claim boosts your benefit checks. This means that a smaller portion of what you need to pay for living expenses will have to come from taxable IRA income.

Several Social Security cards on a US $100 bill.
Several Social Security cards on a US $100 bill.

As a hypothetical example of the dollar impact of using the second strategy, assume a couple plans to retire at 65. They will pay for retirement with a combination of Social Security and IRA withdrawals totaling $70,000 after taxes. They’ll claim the standard deduction of $27,700 and use the income tax brackets for 2023.



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