Social Security was never meant to be the sole source of income for retirees. Even so, with a maximum annual benefit north of $45,000 if you file at full retirement age, it can provide a significant, dependable boost. To get the most out of your benefit you need to plan carefully, however, since you could owe income taxes on as much as 85% of your Social Security.

The amount of Social Security you can count on as part of your retirement income is mainly determined by two things:

1. Your Social Security disbursement, which depends on your lifetime earnings and contributions (via Social Security taxes)
2. Your annual income in retirement, which helps determine how much of your benefits will be taxed

Though benefits are largely based on your earnings history — the more you earn the more you get, up to the maximum benefit — on average, after taxes and adjustments, they’re likely to replace only around 39% of the past earnings of a 65-year-old who retires in 2024.³ Many investors miss this important detail. “That can be a real shock when people begin collecting benefits,” says Ben Storey, director, Retirement Research & Insights, Bank of America. A little upfront planning may help avoid the shock of a hefty tax bill and maximize your Social Security benefits over the long haul.

Social Security benefit taxes are based on what the Social Security Administration (SSA) refers to as your “combined” income. That consists of your adjusted gross income, plus any nontaxable interest you earned (and certain other items) and half of your Social Security income. The thresholds for when your benefits will be taxable vary based on your filing status as shown in the chart below.

As part of an overall strategy to maximize income and minimize taxes in retirement, tax planning experts advise different approaches to taking Social Security payments and taxes into account. Here are some ways to do so:

1. Look past the current year

“When you plan for retirement,” says Vinay Navani, a shareholder with WilkinGuttenplan, an accounting and consulting firm in East Brunswick, New Jersey, “you need to think in terms of multiyear projections.” For example, if you anticipate a big one-time event, such as the sale of a business, you may be better off structuring the sale as an installment sale to be paid off over several years instead of an all-cash transaction. This can help evenly distribute your overall income and possibly keep you in a lower tax bracket, which could help reduce the portion of your Social Security benefits that is subject to federal income tax.

Caution: An unexpected financial windfall could put you in a higher tax bracket, resulting in a bigger tax bill.

2. Time your retirement account withdrawals

You may also want to consider a longer-term strategy for drawing from your individual retirement accounts (IRAs). That's because withdrawals from a traditional IRA generally will be included in your federal taxable income. Qualified withdrawals from a Roth IRA, however, are generally not included in your federal taxable income. So, if you have both, you may want to carefully consider whether you should make withdrawals from your Roth IRA or traditional IRA first.

Tip: Roth IRA withdrawals are not counted as income and won’t increase taxes on your Social Security benefits.

3. Consider nonretirement assets

Your non-IRA investments can also affect how your Social Security income is taxed. For example, you could purchase a tax-deferred account, such as a deferred annuity, and structure it to begin paying income in a few years when you expect your federal taxable income, as well as your overall tax rate, to decline. Your financial planner and a tax professional could help you come up with a strategy that works for your situation.

Caution: If you defer income to reduce this year’s tax bill, it may push you into a higher tax bracket in subsequent years.

4. Determine when working makes sense

Those hoping to work in retirement need to be especially careful if they’re planning to claim Social Security benefits early.

The SSA limits how much you can earn before your benefits are reduced if you start taking your benefits before full retirement age, which is between 66 and 67 for most baby boomers. For every $2 you earn over the limit, your Social Security benefits are reduced by $1. Once you reach the year in which you'll turn your full retirement age, the earned income cap goes up, and for every $3 you go over, your benefits are reduced by $1. Starting with the month you reach full retirement age, there is no limit to what you can earn and receive all of your benefits.

Even if you’re just working part time, it’s important to consider how that continuing income will affect your benefits as shown by the graphic below.

There is some good news, however: Because the penalty is determined by your individual earned income, if you retire early but your spouse doesn’t, your spouse’s earned income will not be factored into the earnings limit. Additionally, when you reach your full retirement age, the earnings limit disappears, and Social Security will recalculate your benefit amount, giving you credit for any months when benefits were reduced due to the earnings limit.⁵

Keep in mind, if you file your tax return jointly, your spouse’s earnings will be included when calculating your combined income for purposes of determining the taxation of your benefits.