Personal Finance

The Surprising Reason You Might End Up With Less Social Security

Maurie Backman

Published: December 20, 2024 7:10 pm

Key Points from 24/7 Wall St.

• Social Security benefits can be subject to taxes.
• The income thresholds at which taxes apply haven’t changed in decades.
• President-elect Trump has proposed eliminating taxes on Social Security benefits, but that may not fly given the program’s financial woes.

If you’re one of the millions of Americans who collects Social Security each month, you may be pretty reliant on those benefits to cover your ongoing expenses. And if you’re new to Social Security and have some income outside of those benefits, you may be in for an unpleasant surprise.

Many seniors are caught off guard when they realize that their Social Security income is subject to federal taxes. And there are a number of states that tax benefits, too.

Making matters worse is that the income thresholds where taxes on Social Security apply are pretty low. So your chances of being taxed on that income are actually annoyingly high.

Who pays taxes on Social Security benefits?

Whether you’ll pay taxes on your Social Security checks or not depends on your combined income. Combined income is the sum of your adjusted gross income, non-taxable interest income you earn (such as interest from municipal bonds), and 50% of your annual Social Security benefit.

If you’re single, a combined income of $25,000 or more means you’re liable for taxes on your Social Security benefits. If you’re married filing a joint tax return, a combined income of $32,000 or more puts you in the same boat.

And if you’re thinking that these combined income thresholds are ridiculously low, well, you’d be correct. Not only are they low, but they’ve been set in stone for decades without any sort of adjustment for inflation and wage growth. The Social Security Administration estimates that about 40% of people who collect monthly benefits are subject to federal taxes on them.

Will taxes on Social Security benefits go away?

President-elect Trump has said repeatedly that he’s looking to do away with taxes on Social Security benefits. And while that might seem like a positive thing, there’s a flipside.

One of Social Security’s revenue sources is federal taxes on benefits. If that revenue stream is eliminated, it could bring the program even closer to insolvency.

As it is, Social Security’s combined trust funds are expected to run dry by 2035. Once that happens, there’s the possibility of broad benefit cuts. Eliminating taxes on Social Security benefits could push up that timeline, which is something lawmakers certainly don’t want.

For this reason, it’s unclear as to whether Trump will have the support needed to get rid of taxes on Social Security benefits. However, there’s one trick you can employ to reduce the likelihood of having to pay them.

Roth retirement plan withdrawals don’t count toward adjusted gross income. So choosing a Roth IRA over a traditional IRA for your savings could help you avoid taxes on your Social Security benefits, since withdrawals from a Roth won’t add to your combined income.

If you’re nearing retirement and have the bulk or all of your savings in a traditional IRA, you can look at doing a Roth conversion. But be sure to consult with a tax professional in that situation, since a Roth conversion could have significant tax implications.