It’s not the fact that you are making money that is causing you to pay taxes on your
Social Security income it is “where” you are making the money that causes the problem.
Social security income is taxed when all of the income on your tax return AND ½ of your
Social Security income exceeds $25,000 if you are single and $32,000 if married filing
So the trick then is to try to keep that number from occurring or at least keeping that
number as small as possible.
If that number is exactly $25,000 (if single) you only pay taxes on the $25,000. However
if the number is $25, 010 you will actually pay taxes on $25,015 because now an amount
equal to ½ of the amount over the $25,000 is the amount of social security that you will
pay taxes on.
Many people have money in savings accounts that they are just saving for a rainy day,
they are not actually using the earnings from those savings accounts for living
expenses. These are the cases where people can adjust their investments so that they
don’t get double taxed. If those people would put some of that money into tax deferred
investments instead they wouldn’t have to pay any taxes on those earnings or on the
affected social security money.
Tax deferred means that you only pay the taxes on the earnings when you actually take
the earnings out of the account. The main products to achieve tax deferred earnings
are Savings Bonds, Annuities, Tax advantaged mutual funds and life insurance.
Unfortunately the obvious answers are not always the correct answers. For example
even though interest from municipal bonds may be tax free they can cause you to pay
taxes on your social security income. The same goes for the capital gains that some
people can pull in tax free right now. The gains may well be tax free but they once again
can cause social security to get taxed.
The best way to pay the least amount of income taxes is to have a professional go over
your return with you and determine if it is possible to stop paying taxes on your social
security income. Then if it is possible, exactly what moves to make to accomplish that