Money Matters

A Way to Cut Tax on Social Security Benefits

About 40 percent of people who receive Social Security are required to pay taxes on at least a portion of their benefits. By cutting eligible income, you may be able to cut the amount of your Social Security benefits that are subject to income taxation. But there are few ways you can do that.

The percentage of your Social Security benefits that are taxed is determined by your provisional income. To calculate it, add up your adjusted gross income (AGI), tax-free interest, and 50 percent of your Social Security benefits.

Married couples with less than $32,000 of provisional income are exempt. Couples earning between $32,000 and $44,000 have up to 50 percent of their Social Security benefits subject to federal income tax. Those making more than $44,000 pay tax on up to 85 percent of their benefits.

For singles, the thresholds are $25,000 and $34,000.

Investing in tax-free municipal bonds cuts your regular tax. But it doesn’t help here because ‘tax-free’ income counts toward the Social Security tax threshold. However, many people can cut their Social Security benefit taxation by purchasing a tax-deferred annuity.

Here’s how it works. Take a couple with $56,000 in provisional income. That includes $42,000 in AGI from taxable interest earnings, dividends and pensions, $2,000 in nontaxable interest, plus half ($12,000) of their $24,000 of Social Security benefits.

They’re in the 15 percent marginal bracket. At their income level, about 68 percent ($16,200) of their Social Security benefits are taxable. That results in a tax of $2,430 on their benefits.

Next, they move enough of their interest and dividend earning investments into a deferred annuity to reduce their AGI by $4,000. As long as the interest earnings are not withdrawn from their annuity contract, they remain tax-deferred and are excluded from provisional income.

Now, with $52,000 of provisional income, they’re taxed on about 53 percent ($12,800) of their benefits, resulting in a tax of $1,920. That’s a $510 reduction in taxes paid on their Social Security benefits.

Additionally, since they reduced their taxable income by $4,000 they’ll also save $600 in ordinary federal income tax, for a total tax savings of $1,110. There are also 13 states that tax Social Security benefits. So the overall tax savings could be even greater.

Once your income exceeds a certain amount, the percentage of Social Security benefits subject to taxation reaches 85 percent. Higher income earners may thus be unable to sufficiently reduce their provisional income to benefit from this strategy.

But a deferred annuity will still reduce your ordinary federal income tax and your state income tax too, if any, regardless of your income level.

Retirees and near-retirees should look for ways to cut taxes and maximize after-tax income. They also have to be sure that there is little risk of losing their savings. Buying a fixed-rate deferred annuity can help seniors achieve both of these goals.

Free service

Figuring out your Social Security taxation under different income scenarios can be surprisingly complex. AnnuityAdvantage offers a free service that calculates how much anyone receiving Social Security benefits can save in taxes by moving various amounts of money and income into a deferred annuity. It’s available by calling 800-239-0356 or writing

Annuity expert Ken Nuss is the founder and CEO of AnnuityAdvantage, a leading online provider of fixed-rate, fixed-indexed and immediate-income annuities. He launched the AnnuityAdvantage website in 1999 to help people easily compare rates and options in principal-protected annuities from many insurers. More information is available from the Medford, Oregon, based company at

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