Can You Cut Taxes You Pay on Your Social Security?
If you have a moderate or low income but earn a lot in interest and dividends from investments that you don't need for living expenses, here is one way you may be able to lower your tax bill.


Can you really do some proactive things to reduce the taxes you pay on your Social Security? Sometimes you can, and we’re going to look at one powerful example.
First, we need to understand the profile of retirees who might be good candidates to reduce the taxes on their Social Security with this strategy. If you show a moderate to low income on your tax return and you are generating a lot of interest and dividends from investments where you don’t need that investment income, you may be able to lower your federal tax bill.
Social Security tax triggers
We start by looking at the basic formula from the Internal Revenue Service that determines how much tax you pay on your Social Security. This is called the Provisional Income Formula. You take your modified adjusted gross income, add half of your Social Security and add all of your tax-exempt interest. This total is your provisional income.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
As this provisional income gets lower, you pay less tax on your Social Security.
For example, if you’re married, filing a joint return and your provisional income is under $32,000, there’s no tax on your Social Security. If it’s between $32,000 and $44,000, then up to 50% of your Social Security can be taxed. If it’s over $44,000, then up to 85% of your Social Security becomes taxable.
The important key to reducing this tax is to eliminate or shelter the interest and dividends on your tax return from investments that are making your provisional income number higher.
How one couple could cut their tax bill
To use a simple illustration, let’s say a 67-year-old couple has provisional income under $32,000. At or below this number, there is no tax on their Social Security.
Let’s assume they get an inheritance from the wife’s mother, and the income on the inherited investments causes their provisional income to go over $44,000, subjecting them to a tax on up to 85% of their Social Security.
Their goal would be to shelter or eliminate the investment income they’re not using to bring their provisional income down. This, in turn, would reduce the tax they pay on their Social Security. Here are three ways they could do that:
- First, the couple could reallocate some of the investment money into retirement accounts, if one or both of the spouses have earned income and they qualify. This could be either an IRA or, perhaps, a small-business retirement plan like a SEP, which would immediately shelter the investment income from taxes.
- They could also reallocate some of the investments into tax sheltered annuities, which would shelter the investment income from taxes.
- Finally, it might be possible to switch some of the investment money they don’t need for income into certain types of growth stocks that generate less taxable income.
Each of these three strategies would bring the provisional income down. If it’s low enough, it may either reduce the tax on your Social Security or, even better, eliminate it.
Get Kiplinger Today newsletter — free
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.
-
RMD Deadline April 1: Five Tax Strategies to Manage Your 2025 Income
Taxable Income The April 1, 2025, deadline for required minimum distributions (RMDs) is fast approaching for retirees who turned 73 in 2024.
By Kelley R. Taylor Published
-
Rising AI Demand Stokes Undersea Investments
The Kiplinger Letter As demand soars for AI, there’s a need to transport huge amounts of data across oceans. Tech giants have big plans for new submarine cables, including the longest ever.
By John Miley Published
-
The Three Biggest Fears Keeping Retirees Up at Night
Here are the steps you can take to put those fears to rest and retire with confidence so you can relax and enjoy the life you've planned.
By Pam Krueger Published
-
What Can a Donor-Advised Fund Do for You? (A Lot)
DAFs and private foundations go about helping charities (and those who donate) in different ways. Each comes with its own benefits and restrictions to navigate.
By Julia Chu Published
-
Estate Planning When You Have International Assets
Estate planning gets tricky when you have assets and/or beneficiaries outside the U.S. To avoid costly inheritance mistakes, it pays to understand the basics.
By Kelsey M. Simasko, Esq. Published
-
Three Essential Estate Planning Steps to Protect Your Nest Egg
After dedicating years to building your wealth and securing your future, make sure your assets are protected and your loved ones are provided for in the future.
By Nicole Farbo, CFP® Published
-
Is Chasing the American Dream Ruining Your Financial Life?
Too many people focus on visible affluence as a marker of success. Here's how to avoid succumbing to the pressure and driving yourself into debt.
By Anthony Martin Published
-
Retiring With a Pension? Four Things to Know
The road to a secure retirement is slightly more intricate for people with pensions. Here are four key issues to consider to make the most out of yours.
By Joe F. Schmitz Jr., CFP®, ChFC® Published
-
How to Teach Your Kids About the Tax Facts of Life
Taxes are unavoidable, so it's important to teach children what to expect. Also, does your child need to file a tax return for 2024? Find out here.
By Neale Godfrey, Financial Literacy Expert Published
-
Revocable Living Trusts: The Good, the Bad and the Ugly
People are conditioned to believe they should avoid probate at all costs, but when compared with living trusts, probate could be a smart choice for some folks.
By Charles A. Borek, JD, MBA, CPA Published