SOCIAL SECURITY WAS NEVER MEANT TO BE the sole source of income for retirees. Even so, with a maximum annual benefit of $48,216 if you file at full retirement age,¹ it can provide a significant, dependable boost. However, if you’re not careful, you could owe income taxes on as much as 85% of your Social Security income.² Here’s how that works — and what you can do to try to minimize the tax you pay.

What goes into determining your Social Security benefit?

Your Social Security benefits are largely based on your earnings history — the more you’ve contributed to the system via payroll taxes over your lifetime, the more you receive, up to the maximum benefit. On average, Social Security replaces around 39% of the past earnings of a 65-year-old who retired in 2024. Yet the system is progressive, so that high earners can expect Social Security to replace just 25% to 30% of their pre-retirement income.³

And that’s before you pay any federal income taxes on your benefits — something an estimated half of Social Security recipients do.⁴ Still, people aren’t always aware of this critical piece of their retirement picture. “It can be a real shock when people begin collecting benefits,” says Ben Storey, director, Retirement Research & Insights, Bank of America. But, he adds, a little upfront planning may help you avoid any shocks when calculating your taxes while also maximizing your Social Security benefits over the long haul.

How much of your benefit may be taxed?

The amount you pay in federal income tax on your Social Security benefits is based on your “combined income,” as the Social Security Administration (SSA) terms it. That’s your adjusted gross income, plus any nontaxable interest you earned (along with certain other items), plus half your Social Security income. The threshold at which benefits become taxable vary, based on your combined income and filing status. (See “Calculating your Social Security federal income tax” below.) These thresholds are fixed – but because Social Security benefits typically increase each year to account for inflation, you may see your benefits taxed over time.  The amount of federal income taxes you actually owe, if any, will depend on your income level, available deductions and exemptions, and other factors.  State taxes may also apply to your Social Security benefits – consult your tax advisor.

As part of an overall retirement income strategy, tax planning experts suggest a few ways to potentially minimize taxes on your Social Security payments:

1. Time your retirement account withdrawals

You may want to consider a longer-term strategy for drawing from your individual retirement accounts (IRAs). That's because distributions from a traditional IRA are generally included in your federal taxable income. Qualified distributions from a Roth IRA, however, are generally not. So, if you have both, you may want to put some thought into when you make withdrawals from one account or the other.

2. Consider nonretirement assets

Your non-IRA investments can also affect how your Social Security income is taxed. One strategy that might be worth considering is to purchase a tax-deferred account, such as a deferred annuity, and structure it to begin paying income in years to come when you expect your federal taxable income – as well as your overall tax rate – to decline. Your financial planner and a tax professional could help you come up with a solution that works for your situation.

3. Look past the current year

“When you plan for retirement, you need to think in terms of multiyear projections,” says Vinay Navani, a shareholder with WilkinGuttenplan, an accounting and consulting firm in East Brunswick, New Jersey. “For example, if you anticipate a one-time bump in income, such as from the sale of a business, you may be better off structuring it as an installment sale to be paid off over several years, instead of as a lump sum.” This can help you distribute your overall income more evenly, and possibly keep you in a lower tax bracket. That in turn could help reduce the portion of your Social Security benefits subject to federal income tax.

4. Determine when working in retirement makes sense

If you’re planning to work in retirement, keep in mind that those earnings may raise your income enough to trigger higher taxes on your Social Security. And if you’re thinking about claiming benefits early, you need to be especially careful about taking a job – when you start collecting benefits before full retirement age, Social Security limits how much you can earn before your benefits are reduced.

For every $2 you earn over the limit, your Social Security benefits are reduced by $1. Starting in the year you reach full retirement age, the earned income cap goes up, and for every $3 you exceed the limit, your benefits are reduced by $1. On the month you reach full retirement age, the earnings cap disappears. As the graphic below shows, even a part-time job can have an impact.

There is some good news: When you reach full retirement age, Social Security recalculates your benefit, giving you credit for any months when benefits were reduced due to the earnings limit.⁵ And because the penalty is determined by your individual earned income, if you retire early but your spouse doesn’t, your spouse’s earned income won’t count toward the earnings cap.

One wrinkle worth keeping in mind: if you file your tax return jointly, your spouse’s earnings will be included in your combined income in order to determine whether – or how much – your benefits will be taxed.