I’m Receiving $3,500 Per Month From Social Security. How Can I Reduce My Taxes?

Social Security can provide a steady source of retirement income. The amount you receive generally depends on how much you earned during your working years and the age at which you begin claiming benefits.

In 2026, someone who earned the maximum taxable income throughout their career and waited until age 70 to claim benefits could receive just over $62,000 per year.¹ But as always, more money means more taxes. While you don’t owe payroll (or “FICA”) taxes on Social Security benefits, the IRS can levy income taxes on them. Someone collecting $3,500 per month in benefits would likely owe some taxes.

If you have questions about how Social Security income fits into your broader retirement plan, a financial advisor may help you review your income sources and potential tax implications.

How Social Security Benefits Are Taxed

Social Security benefits are taxed based on a system called “combined income.” This is calculated as your:

Adjusted gross income, or “AGI,” plus
Any nontaxable interest, plus
Half of your Social Security benefits

So, for example, say that you withdraw $75,000 in taxable income from your retirement portfolios in addition to your current $42,000 per year in benefits. Your combined income would be $96,000 (AGI + 0.5*Benefits = $75,000 + (0.5 * $42,000) = $96,000)

From there, your taxes are assessed based on filing status. For individuals, the tiers are:

Combined income below $25,000: Benefits are not taxable
Combined income between $25,000-$34,000: Income taxes on up to 50% of your benefits
Combined income above $34,000: Income taxes on up to 85% of your benefits

For joint filers, the tiers are:

Combined income below $32,000: Benefits are not taxable
Combined income between $32,000-$44,000: Income taxes on up to 50% of your benefits
Combined income above $44,000: Income taxes on up to 85% of your benefits

Married individuals filing separate returns almost always pay income taxes on their benefits.

These tiers are not tax rates. This is the percentage of your Social Security benefits that’s included in your taxable income. For example, with $96,000 of combined income, you would add up to $35,700 to your taxable income. (0.85 * Benefits = 0.85 * $42,000 = $35,700).

Need help minimizing your taxes? Match with a financial advisor today.

How Can You Reduce Social Security Taxes?

Strategies to reduce your benefits taxes typically start in the same place: You have to reduce your taxable income. At each tier of combined income, the taxable portion of your benefits increases. So to reduce those taxes, you have to adjust where you fall within those tiers.

Here, you are starting with $21,000 in combined income ($3,500 * 12 / 2 = $21,000). This isn’t enough to trigger taxes for either an individual or a joint filer. Your taxes, then, will depend on your other sources of retirement income. A few strategies to reduce those taxes include:

Make a Roth Conversion

Perhaps the most straightforward option is to convert all or part of your retirement assets into a Roth IRA. Once you do this, those withdrawals will not count as taxable income. This can help keep your AGI down, even zeroing it out if you convert everything to a Roth fund, which in turn reduces your combined income.

The problem with this strategy is up-front cost. To make a Roth conversion you will need to pay income taxes all at once on the amount you convert. It will not only be expensive, it may actually lose you money in the long run depending on how your tax rates fall out. You also cannot make penalty-free withdrawals from a Roth IRA within five years of opening it.

A financial advisor can help you build a Roth IRA conversion strategy.

Adjust Your Withdrawals

You can manipulate how and when you take income. Specifically, you can manage your withdrawals to minimize or maximize your taxable income from year to year based on where you fall within the Social Security tiers

For example, you collect $42,000 in total benefits right now. Say that you want to live on $80,000 per year. You would withdraw another $38,000 from your retirement accounts, bringing your combined income to $59,000 ($38,000 + (0.5 * $42,000) = $59,000).

Since this puts you above the $34,000 threshold, up to 85% of your benefits can be included in taxable income. You won’t increase your benefits taxes by increasing your income.

So, you could withdraw $76,000 from your retirement account instead. This will give you a combined income of $97,000 ($21,000 + $76,000 = $97,000), still within the 85% tier, but you would have next year’s income already withdrawn. So, with no withdrawals, next year you would have a combined income of $21,000 and trigger no benefit taxes at all.

Now, this is a clumsy example used just for the purposes of demonstration. In reality, you would want to plan more carefully so that you don’t replace benefit taxes with portfolio income taxes. But used wisely, this approach can save you real money. A financial advisor can help you weigh the costs and benefits of your options.

Frequently Asked Questions (FAQ)

How much of Social Security benefits can be taxed?

Up to 85% of your Social Security benefits may be taxable depending on your total income. The IRS determines this using a formula called provisional income, which includes half of your Social Security benefits plus other income sources such as wages, retirement withdrawals, interest and dividends.

What income makes Social Security benefits taxable?

Social Security benefits can be subject to federal income tax once your provisional income passes certain limits. For individuals filing alone, taxation can begin when provisional income is higher than $25,000. For married couples filing jointly, the starting threshold is $32,000. As income increases beyond these levels, a larger share of benefits may become taxable, first up to 50% and potentially as much as 85%.

Do withdrawals from retirement accounts affect Social Security taxes?

Yes. Withdrawals from tax-deferred accounts such as traditional IRAs and 401(k)s count toward your provisional income. Higher withdrawals from these accounts can increase the portion of your Social Security benefits that is subject to taxation.

Are Social Security benefits taxed by states?

Some states tax Social Security benefits while many do not. State tax rules vary widely, and some states offer exemptions or income thresholds that reduce or eliminate state taxation on benefits.

Bottom Line

There may be other ways to reduce your AGI and lower your overall tax bill, such as through deductions for charitable gifting or taking advantage of tax credits. But at the higher end of the Social Security benefits scale, you’ll most likely face taxes on a majority of your benefits if you’re receiving retirement income from a taxable portfolio. Fortunately, there are potentially ways to reduce that burden.

Retirement Tax Tips

Different categories of income have different tax rules and rates. For your retirement, it’s essential that you understand the federal tax rules for all of your different types of retirement income.
A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

Article Sources

All articles are reviewed and updated by SmartAsset’s fact-checkers for accuracy. Visit our Editorial Policy for more details on our overall journalistic standards.

“What is the maximum Social Security retirement benefit payable?” Social Security Administration, https://www.ssa.gov/faqs/en/questions/KA-01897.html