When Uncle Sam Wants His Money Back / These 3 steps can help ease the tax bite on your Social Security benefits

Robert Powerll for the Wall St. Journal writes: The rules for income tax on Social Security payouts have long confounded beneficiaries—and can make it harder to stretch a dollar in retirement. Indeed, as much as 85% of a recipient's benefit can be taxed, depending on how much other income there is and what the sources are. If wages, income from self-employment, interest, dividends and other taxable income exceed a certain threshold, part of your Social Security income will need to be reported as well. An individual earning as little as $25,000 from combined sources may owe taxes on up to 50% of his or her benefit.

Here are some tips older Americans can use to reduce or avoid the amount of taxes they might pay on their Social Security benefits.

Convert to A Roth IRA.

One strategy is to convert all or some of your traditional IRA into a Roth IRA. Distributions from a traditional IRA are viewed as income that could affect your benefit. Qualified distributions from a Roth IRA, however, are nontaxable and won't affect benefits.

There are a few catches. Amounts from Roth conversions count toward your taxable annual income, so the ideal time to do a Roth conversion is before Social Security benefits start.

"It means biting the bullet and paying taxes sooner than you need to," says Elaine Floyd, director of retirement and life planning at Horsesmouth, a New York City-based provider of content to financial advisers.

But you can also make partial, strategic conversions, spreading them out to benefit from a lower tax rate, Ms. Floyd says.

Delay Taking Social Security.

The best thing about delaying the start of your Social Security benefits is it increases your eventual payouts: by 8% for every year that you delay receiving benefits beginning with the year you reach full retirement age—67 for people born after 1959—until 70.

Most retirees should defer collecting Social Security for as long as they can, and draw on their retirement accounts when they need money, says David Freitag, vice president at Impact Technologies Group Inc., a Charlotte, N.C. financial-planning technology firm.

By drawing down your retirement funds, Mr. Freitag says, you also are reducing the amount of your required minimum distributions after you turn 70½, which could lower your taxable income if you have a traditional IRA.

Convert Your 'Countable' Income.

If you're already collecting benefits and have investment income that you don't need—and that pushes your benefit into taxable territory—consider "converting your countable income into non-countable income," says Andy Landis, founder of Thinking Retirement, a retirement-education website.

For example, a certificate of deposit generating $5,000 of unneeded income may trigger Social Security taxation. But you could sell the CD and buy a deferred annuity instead, Mr. Landis says. The income will be deferred, and so will any tax owed on it.

The same is true if you own a traditional IRA or tax-advantaged investments such as stocks that don't pay dividends and so are subject only to capital-gains tax. With those types of accounts and investments, you could delay any tax impact by not taking distributions from your traditional IRA until age 70½, or by putting off generating capital gains until necessary.

Simply put, having money in an IRA can allow you to time the receipt of that income to avoid being taxed on your Social Security benefit. You have to coordinate and balance the withdrawals from your taxable and retirement accounts with your Social Security checks so they support the best tax strategy.

Says Mr. Freitag, "Just like a seesaw on a playground, balancing is the key to a successful, fun ride and not a crash."