Social Security serves as a critical source of income for millions of retired seniors. But many recipients are shocked to learn that their benefits are subject to taxes, thereby leaving them with less money to pay the bills.
The good news? A couple of strategic moves on your part could help you get out of paying taxes on your Social Security income. Here's how to pull that off.
1. House your retirement savings in a Roth IRA
To see if you're liable for taxes on your Social Security benefits, you'll need to calculate what's known as your provisional income. You can arrive at that figure by adding up your non-Social Security income (including tax-free income you might be entitled to, like interest from municipal bonds) plus 50% of what you receive from Social Security on an annual basis.
You may be taxed on up to 50% of your benefits if your provisional income equals:
- $25,000 to $34,000, and you're a single tax filer.
- $32,000 to $44,000, and you're a couple filing jointly.
But wait -- it gets a bit worse. You may be subject to taxes on up to 85% of your benefits if your provisional income exceeds $34,000 as a single tax filer, or $44,000 as a couple filing jointly. As such, it's often the case that seniors who have income outside of Social Security ultimately wind up being taxed on their benefits to some degree.
A good way to avoid that scenario, however, is to house your retirement savings in a Roth IRA. With a regular IRA, your withdrawals during retirement are taxed and count toward your provisional income. Roth IRA withdrawals, on the other hand, are not taxed and are not counted toward provisional income, which means you may be able to avoid paying taxes on your benefits if you choose the right savings vehicle.
2. Move to a state that doesn't tax benefits
Your provisional income will determine whether you pay taxes on your Social Security benefits at the federal level. But the state you retire to will dictate whether your benefits are subject to taxes at the state level.
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