This sneaky Social Security tax could shock retirees — avoid it now

Many people plan to start getting Social Security money after retirement and think they will receive the full monthly amount without any cuts. But experts warn that this is not always true because some retirees may have to pay federal taxes on their Social Security benefits. A big reason many retirees get surprised is because they do not know about a rule called “combined income” or “provisional income.” This rule decides whether their Social Security benefits will be taxed by the government.

Combined income is calculated by adding three things together — a person’s adjusted gross income, any tax-free income they receive, and 50% of the Social Security benefits they get in a year. If this combined income goes above $25,000 for a single tax filer, the government may start taxing up to 50% of that person’s Social Security benefits. For married couples who file taxes together, the first limit is $32,000. If their combined income crosses this amount, up to 50% of their Social Security benefits could become taxable, according to The Motley Fool.

Social Security tax income limits

The tax can become even bigger if income rises further. If a single filer earns more than $34,000 in combined income, they may have to pay taxes on up to 85% of their Social Security benefits. For married couples filing jointly, the higher limit is $44,000. If their combined income crosses this level, up to 85% of their Social Security benefits may be taxed.


One major problem is that these income limits do not increase with inflation. Unlike Social Security’s yearly cost-of-living adjustments or wage caps, these tax thresholds stay the same, which means more retirees may face taxes over time. Experts say several common sources of money in retirement can push a retiree’s income above these limits, which increases the chance of Social Security benefits getting taxed. For example, withdrawals from traditional retirement accounts like IRAs or 401(k)s count toward combined income and can raise the chances of Social Security taxes, as stated by The Motley Fool.

Income sources that trigger Social Security tax

Required Minimum Distributions (RMDs) — the mandatory withdrawals retirees must take from retirement accounts after a certain age — can also increase combined income and trigger Social Security taxes. Even profits from investments, known as capital gains, can raise combined income and make Social Security benefits taxable for retirees. Financial experts say retirees can take a few smart steps to reduce the chances of their Social Security benefits getting taxed.

One strategy is saving money in a Roth IRA or Roth 401(k) while working, because withdrawals from these accounts usually do not count toward combined income. Another step is doing Roth conversions before starting Social Security benefits, which can help lower taxable income later in retirement, as per the report by The Motley Fool. Retirees can also spread out withdrawals from traditional retirement accounts over time so their yearly income does not suddenly jump above the tax limits.

Experts also suggest being careful about when to sell investments, because spacing out the sale of assets can help control capital gains and keep combined income lower. However, experts say avoiding these taxes is not always possible, especially for retirees who saved most of their money in traditional retirement accounts and must start taking RMDs later.

Still, understanding how Social Security taxes work can help retirees plan better and avoid surprises when they start receiving benefits. The report also says that some little-known strategies may help retirees increase their Social Security income, and in some cases people could boost their yearly benefits by as much as $23,760 if they use the right claiming strategies, according to the report by The Motley Fool.

FAQs

Q1. Do retirees have to pay tax on Social Security benefits?

Yes, retirees may have to pay federal tax on Social Security benefits if their combined income crosses certain limits set by the government.

Q2. What income can make Social Security benefits taxable?

Money from retirement accounts, required minimum distributions, and investment profits can increase combined income and make Social Security benefits taxable.