I haven’t met anyone who eagerly anticipates tax filing, but typically, it’s just a tedious afternoon that ends with a nice refund landing in your bank account. However, the situation is quite different for many seniors. Unlike salaried income, there’s often no tax taken out from withdrawals made from their retirement accounts, leaving many retirees with a tax bill when it’s time to settle with the IRS.
The process becomes even more complex because they can’t just consider their income from employment and tax-deferred retirement withdrawals. The federal government might tax as much as 85% of their Social Security benefits depending on their income and marital status.
How Social Security Taxation Unfolds
Social Security benefits weren’t always taxed. In fact, during the late 1970s and early 1980s, as the program faced financial strain, taxes were introduced to boost the funds and prevent the program from becoming insolvent. An additional tier of taxes was added in the early 1990s.
The taxation rules have largely stayed the same since then. The IRS evaluates your marital status and provisional income—which includes your adjusted gross income (AGI), any nontaxable interest like that from municipal bonds, plus half of your annual Social Security benefits. Here’s a quick look at the existing tax brackets:
| Marital Status | 0% of Benefits Taxable If Provisional Income Is Under: | Up to 50% of Benefits Taxable If Provisional Income Is Between: | Up to 85% of Benefits Taxable If Provisional Income Exceeds: |
|---|---|---|---|
| Single | $25,000 | $25,000 and $34,000 | $34,000 |
| Married | $32,000 | $32,000 and $44,000 | $44,000 |
Source: Social Security Administration.
It’s important to note that the IRS isn’t taking 85% of your benefits. Rather, your position in these brackets determines how much of your benefits are subject to regular income tax. For example, if you fall into the 22% tax bracket, you’d pay that percentage in taxes on as much as 85% of your benefits. This can pack a punch for seniors.
These taxes are becoming more prevalent as those income thresholds aren’t adjusted for inflation. With average incomes and benefits on the rise, more retirees are finding themselves needing to pay taxes on their benefits. There currently aren’t any plans to adjust these thresholds to reflect the increase in average benefits.
Steps Seniors Can Take
President Donald Trump expressed an interest in eliminating Social Security benefit taxes, but it would require Congressional action. As of now, there hasn’t been any movement, and no immediate relief is on the way for those who owe these taxes.
For 2024, if you’re facing taxes you can’t cover in one payment, consider reaching out to the IRS to arrange a payment plan. It’s essential not to sidestep these taxes, as the IRS could begin garnishing your Social Security checks directly.
Looking ahead to 2025 and beyond, you might be able to reduce your tax burden by minimizing taxable withdrawals from your retirement accounts. Keep track of which tax bracket you fall into and perhaps rely more on Roth savings to avoid tipping into a higher bracket. Roth contributions are taxed when you pay into them, sparing your withdrawals from taxation later on.
Another option is arranging for the IRS to withhold taxes from your Social Security payments. This preemptive measure can save you the headache of figuring out your tax responsibility, and if any excess is withheld, it’ll be refunded when you file your tax return.
If you’re unsure how Social Security taxes might impact you, consulting with a tax professional can offer clarity, especially if you live in one of the few states that continues to levy additional Social Security benefit taxes.
