Social Security is generally slightly less than your pre-retirement income (from 28% for maximum earners to 79% for low earners, according to the SSA), but it may still be taxable.
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Since no one wants to pay more taxes than they have to, I asked ChatGPT how retirees can reduce taxes on their Social Security income. Here’s what needs to be said.
ChatGPT started with provisional income statements, which are the basis for paying Social Security income taxes. Temporary income is equal to gross income (AGI) plus non-taxable interest plus 50% of your Social Security benefits. If your temporary earnings are more than $34,000 and you’re single, or $44,000 and you’re married filing jointly, 85% of your Social Security benefits will be taxable. If your temporary income is between $25,001 and $34,000 and you’re single, or if it’s between $32,001 and $44,000 and you’re married, up to 50% of your Social Security benefits will be taxed.
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There are ways to reduce the amount of tax you pay on your Social Security, and it starts with reducing your temporary income. Here are some strategies.
ChatGPT recommends using Roth accounts instead of traditional IRAs for your retirement savings, which is good advice, but you’ll need to plan ahead. Qualified withdrawals from Roth IRAs and Roth 401(k)s are taxable and generally do not increase temporary income. However, opting out of traditional IRAs and 401(k)s
Starting at age 73, many tax ??’ Deferred retirement accounts—including traditional IRAs and 401(k)s—require minimum withdrawals that are generally taxable. While you can’t convert an RMD into a Roth, switching funds before starting RMDs can reduce future withdrawals. Qualified charitable distributions (the next ChatGPTs strategy) can satisfy RMDs without increasing taxable income.
If you’re age 70½ or older, you can contribute up to $111,000 per year (indexed for inflation, per the SAFE Act 2.0) directly from your IRA to a qualified charity. And since QCDs are excluded from income and not deductible, they don’t increase your taxable income.
By subtracting realized capital gains, dividends, interest and rental income, you reduce your short-term income. Do this by using taxable funds, holding growth stocks with low dividends and carefully harvesting tax losses.
