7 Ways to Reduce Taxes on Social Security Benefits

If you’ve considered converting a traditional IRA to a Roth IRA to gain such tax advantages, now might be a good time, Steffen says. While the bear market lowers stock prices and IRA account balances, the tax hit from a Roth conversion will be less than when stocks sold at higher prices. 

2. Donate your RMDs to charity. 

If you’re at an age where you must take required minimum distributions (RMDs) from your retirement accounts and you have an IRA, you can avoid having the proceeds count as taxable income by donating the money to charity by Dec. 31 of each tax year.

You can't make these qualified charitable donations (QCDs) from a 401(k), but you can still use this strategy by rolling the necessary funds into an IRA before making the contribution.

“This is a good strategy for somebody who is forced to take money out of an IRA that they don’t need,” Steffen says. Just remember that the RMD donation must be transferred directly from your account to the charity. 

3. Take IRA or 401(k) withdrawals before claiming Social Security. 

The advantages of this approach are twofold. First, taking distributions from tax-deferred retirement accounts will reduce your balance, thus reducing the size of your future RMDs (which are determined, in part, by how much is in the account) and, by extension, your future AGI.

Second, generating income from your retirement accounts early enables you to defer taking Social Security, which results in bigger benefits. Your monthly benefit amount increases by 5 percent to 8 percent for each year between the ages of 62 and 70 that you delay claiming it.

4. Make tax-deductible contributions to retirement accounts. 

Depending on your income and whether you have a job-based retirement plan such as a 401(k), contributions to an IRA can be fully or partially tax-deductible and thus lower your AGI.

The IRS annually sets limits on deductible IRA contributions. It’s not too late to max out for the 2023 tax year: Earners over age 50 can stash up to $7,500 in pretax dollars in an IRA by April 15. For the 2024 tax year, the contribution limit rises to $8,000. 

Contributions to a health savings account (HSA) may also be tax-deductible and reduce your taxable income, Harden notes.

5. Defer gig-work income. 

If you earn extra dollars driving for Uber, walking dogs for Rover.com or doing freelance consulting work, you can lower your taxable income in a few different ways, says Mark Steber, senior vice president and chief tax information officer at Jackson Hewitt Tax Service. 

For example, you could:

• Defer income into another year by sending out invoices after Dec. 31. 
• Pull business expenses you planned for next year — say, a new printer for the home office or a professional development course — into the current year to take the tax deduction sooner.
• Contribute pretax dollars to an eligible retirement account, such as a traditional IRA, Solo 401(k) or SEP (simplified employee pension) IRA. 

Or you could simply opt to work a little less, if you’re getting close to one of the income thresholds and the tax savings from not crossing it would make up for the lost income.

6. Offset investment gains with losses. 

Taxable stock portfolios took a hit in the bear market. If you sell some depressed stocks, you can use those losses to offset income earned on capital gains and potentially write off up to $3,000 in ordinary income. This strategy, dubbed tax-loss harvesting, is a way to “realize a loss and take it as a tax deduction,” Birkett-Brunkhorst says.

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7. Pivot to a tax-efficient investment portfolio. 

Loading up taxable investment accounts with assets that generate lots of income, such as real estate investment trusts, dividend-paying stocks or most types of bonds, can increase the tax hit on your Social Security benefits. An alternative strategy might be putting income-generating investments into tax-deferred accounts such as IRAs and 401(k)s. 

You’ll want to fill your taxable accounts with growth stocks. These only generate capital gains when they are sold, and those gains are taxed at a more favorable rate than ordinary income if they come from assets held for at least 12 months. For the 2024 tax year, the long-term capital gains rate is:

• 0 percent if taxable income is up to $47,025 for single filers, $94,050 for married couples filing jointly.
• 15 percent if taxable income is $47,026 to $518,900 (single) or $94,051 to $583,750 (couple).
• 20 percent if taxable income is over the maximums above.

“If you have investments that have advantageous capital gains treatment or potentially lower dividends, that’s going to be something that will lower your AGI and lower the taxable amount of your Social Security,” Harden says.