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Approximately 40% of households pay taxes on their Social Security benefits, according to the Social Security Administration. If you do owe taxes on your benefits, managing them effectively could save you a lot of money.

If you need help planning for Social Security or taxes in retirement, consider working with a financial advisor.

However, there aren’t many ways to do that. Social Security taxes are based on a rather straightforward income formula. The only real ways to reduce how much of your benefits are taxable is to reduce your taxable income or qualify for a lower marginal tax rate.

For example, say that you expect to earn $3,300 per month from Social Security. Here’s how your taxes will work and how you may be able to reduce taxes on those payments.

Depending on your income, a percentage of your Social Security benefits may be included in your taxable income. This usually applies when you have additional income beyond your Social Security benefits, although particularly high-earners can trigger taxes based on their benefits alone.

Benefits taxes are calculated using two separate figures: combined income and taxable income. Your combined income is used to determine the amount of Social Security benefits subject to taxation. Your taxable income is a separate figure used to determine your actual taxes.

First, you calculate your combined income:

So, in our example, you have $39,600 per year in Social Security income. Absent any other income, that gives you a starting combined income of $19,800.

If your combined income is less than $25,000 as an individual or $32,000 as a married couple, you will not pay taxes on your Social Security benefits. If your combined income is between $25,000 and $34,000 as an individual or between $32,000 and $44,000 as a married couple, you pay taxes on up to 50% of your benefits. This can be a sliding scale. Your exact rate will be determined using IRS Publication 915.

If your combined income is above $34,000 as an individual or above $44,000 as a married couple, you pay taxes on up to 85% of your Social Security benefits. Again, this can be a sliding scale.

Once you know your benefits tax tier, you can calculate your taxable income.

To do this, you multiple your tax tier (0%, 50% or 85%) times your total Social Security benefits. Then, you add the resulting amount to the rest of your taxable income. Your taxes will then be based on this total.

The result of this system is that some of your benefits will be taxed and some will not be. For example, say you are in the 85% bracket. In this case, you will add 85% of your benefits to your taxable income, and you will not pay taxes on 15% of your benefits.

Like with most retirement income, benefits are not subject to FICA (payroll) taxes, so you will only pay income taxes on this money.

Let’s look at our hypothetical scenario using three different examples. (You can also run your own numbers through the IRS benefits tax calculator.) We’ll assume you’re single.

Here, you have only Social Security benefits ($39,600) and no other sources of retirement income. Your taxes would be based in the following inputs:

• Combined Income: $0 + $0 + (0.5 * $39,600) = $19,800

• Social Security Tax Tier: 0%

Ordinarily, with $19,800 of income you would pay $595 in federal taxes (absent any special credits or deductions). However, your combined income falls below the $25,000 threshold, so none of your benefits are taxable. As a result, you would have no taxable income and pay no federal income tax.

Here, you have Social Security benefits plus an additional $12,000 per year from your 401(k). Your taxes would be based on the following:

• Combined Income: $12,000 + $0 + (0.5 * $39,600) = $31,800

• Social Security Tax Tier: 50%

Since your combined income is between $25,000 and $34,000 as an individual, 50% of your Social Security benefits would be added to your taxable income. As a result, your taxable income would be the same as your combined income, and you would owe around $1,934 in federal income tax.

In our third scenario, you have Social Security benefits plus an additional $50,000 per year from your 401(k). Your taxes would be calculated based on the following:

• Combined Income: $50,000 + $0 + (0.5 * $39,600) = $69,800

• Social Security Tax Tier: 85%

Since your combined income is above $34,000 as an individual, you would pay taxes on 85% of your Social Security benefits. As a result, your taxable income would be $83,575 ($50,000 + $33,660) and you would owe around $10,666 in federal income tax.

Keep in mind that these are estimates. If you need help calculating your own tax liability, consider working with a financial advisor with tax expertise.

So, how can you reduce the taxes on your Social Security benefits?

Overall, the only way to reduce the taxes you pay on Social Security benefits is to reduce either your taxable income, your marginal tax rate or both.

It’s important to note that you can help manage the impact of these taxes by requesting federal withholding. If you do this, the SSA will withhold your likely taxes from each benefits check, helping you to avoid a nasty income tax bill when you file your tax return for the year.

Beyond that, here a few strategies for reducing your tax liability:

This is perhaps the most straightforward option. Income that you generate from a Roth IRA does not count as taxable income and is also not subject to required minimum distributions (RMDs). Since Roth withdrawals aren’t part of your adjusted gross income, they’re also not calculated in your combined income for benefits tax purposes. As a result, if you generate most or all of your income from Roth withdrawals, your Social Security benefits may not be subject to any significant taxation (depending on your benefit amount).

That said, remember that Roth conversions have a hefty up-front tax cost. For households near or in retirement, converting a significant amount from a pre-tax portfolio may leave you paying more in taxes on the conversion than what you would save on your Social Security taxes.

This is an equivalent to Roth conversions, but generally less advantageous.

Here, you would move your money from a pre-tax retirement account into a taxable brokerage account. From there, your withdrawals may be subject to a mix of capital gains and income taxes depending on the nature and duration of your investments. However, returns subject to capital gains taxes will not count toward your combined income, again giving you an advantage when it comes to calculating the proportion of benefits subject to taxation.

However, you will still pay up-front taxes on the money you move out of your pre-tax portfolio. For this reason, households may do better with a Roth conversion (which eliminates taxes altogether) than a capital gains conversion (which restructures taxes).

Finally, you can structure your withdrawals around the benefit tax tiers.

While even a small amount of additional income can push you into the 85% bracket, it can be very useful to manipulate your income around these tax tiers.

The key here is to remember two things. First, money in savings does not count as income for tax purposes. Second, the tax tiers apply to your entire benefits check. The idea, then, is that you can withdraw extra money above a tier in one year, set it aside in savings, then withdraw less for several additional years.

The goal is to keep your combined income in the 0% or 50% brackets as often as possible. The cost, however, is that you lose out on any investment returns for the money that sits in savings.

Say that in general you want to take $15,000 from your 401(k). On its own this would give you a combined income of $34,800 ($15,000 + $19,800), so you would pay taxes on 85% of your benefits. Instead, in one year you could withdraw $20,000, still paying taxes on 85% of your benefits. Then, for the next four years, you could withdraw $14,000 from your portfolio and $1,000 from savings. That would give you a combined income of $33,800, so for those four years you would only pay taxes on 50% of your benefits.

This kind of structured withdrawal is difficult to manage, particularly in the long run. It may be best executed with the help of a financial advisor, one who can help you prepare this kind of tax planning years ahead of time.

Social Security benefits are taxed based on how much overall income you have. The only real way to reduce those taxes is to lower your tax rate or reduce your income, which is often best done with either a Roth IRA or structured withdrawals.

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