How to Reduce Social Security Tax

Taxes can reduce the amount of your Social Security income.

Federal income tax on Social Security is applied to income that you receive in addition to your Social Security payments. The full amount of Social Security is not paid out until you have reached the age of 66. This means that you may have other sources of income that can increase your tax liability when you begin to receive Social Security payments. You can reduce Social Security taxes by limiting the amount of income received from other sources.

Things You'll Need

• Form 1040 or 1040A Instruction Book

Instructions

1. Calculate your potential tax liability by adding half of your benefits from Social Security to all of your other income sources. If the amount you calculate is greater than the base amount for your tax-filing status, a portion of your benefits will be taxed. Base amounts are $25,000 for individuals or married individuals filing separately and $32,000 for married individuals who file jointly.

2. Complete the worksheet that is included in your form 1040 or 1040A instruction book to determine how much tax you may potentially owe.

3. Reduce the amount of interest income you receive. Interest income can be received from many sources, such as a CD or certificate of deposit. Sell the certificate of deposit and transfer the funds to another type of investment that does not pay a dividend, such as an tax-deferred annuity.

4. Reduce the amount of dividend income you receive from mutual funds, bank accounts and dividend paying stocks. Sell dividend-paying stocks that you do not need. You can also cash in the mutual fund or convert it to a fund that does not pay dividends.

5. Pay taxes throughout the year if you have a government pension that is taxable. Complete a form W-4V to indicate how much tax to withhold from your benefit payment. This will reduce the amount of tax that you will owe the following year.

Tips & Warnings

• If you only receive Social Security with no other source of income, the benefits you receive are not taxable.

• You will have a capital gains tax on any income that you receive when a mutual fund or stock is sold.

References

• BankRate: Some Social Security benefits may be taxable
• The Estate Preservation Advisor: How to Reduce or Eliminate Tax on Your Social Security Retirement Benefits
• Social Security Onilne: Understanding The Benefits

Resources

• Internal Revenue Service: 1040 Instruction Book