Why Your Social Security Benefits Might Be Taxed for the First Time Ever

Social Security payments were designed to help seniors supplement their income, giving them a little extra money to help make their retirement savings and other investments seem more robust once they stop working.

However, many people have found themselves with only Social Security to rely on in retirement, making it important to ensure every dollar of that benefit reaches your bank account. But tax laws make that harder for some people, who say they are seeing their benefits taxed for the first time ever. Here’s why the pros say that’s happening, and what you can do to keep more money in your wallet.

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‘Tax Creep’ May be to Blame

The reason your Social Security benefits are being taxed may have to do with your other income, according to D’Andre Clayton, Co-Founder at Clayton Financial Solutions. “This is less about having higher income in a traditional sense and more about structural tax creep,” he explains, noting that Social Security taxation is driven by provisional income and not taxable income.

“For instance, many seniors believe that municipal bonds aren’t taxable because they are tax-exempt; the same is true for rental income, etcetera,” he continues. “Tax-exempt is different from tax-free; the key differentiator is the adjusted gross income (AGI).”

Another problem Clayton says people are facing is the fact that the thresholds were set in 1983 and 1993, but were never indexed to inflation, and they are:

• $25,000 for a single person and $32,000 for a married person, which can cause up to 50 percent of your income to be taxable
• $34,000 for a single person and $44,000 for a married person, which can cause up to 85 percent of your income to be taxable

Related: The Best Strategies To Protect Your Social Security From the IRS

What Can You Do to Prepare

When you’re on a fixed income, every penny counts. That’s why Sherman Standberry, CPA, and CEO of My CPA Coach, says it’s important to prepare ahead of time so you don’t get a shock come tax time.

“All seniors over the age of 65 should review their qualifications for the new $6,000 bonus deduction passed under the Big Beautiful Bill,” Standberry says. “This deduction can be used to offset taxable portions of social security benefits, or other forms of income.”

Clayton says you can also try to manage the timing of alternative income streams. “Consider a Roth conversion as early as possible,” he says, adding that the more distance you can put between distributions and Social Security payments, the better.

Related: Social Security Recipients Won’t Be Eligible For Hefty $6k Tax Deduction If They Make This ‘Mistake’

He also suggests:

• Filling those lower-income brackets earlier
• Sequencing your withdrawals from other types of accounts
• Blending taxable, tax-deferred, and tax-free income buckets
• Considering other forms of income, like reverse mortgages or home equity lines of credit (HELOCs)

While death and taxes come for us all, the advice from these pros may at least help you delay how much tax you have to pay on those all-important Social Security benefits.

Disclaimer: This article is for informational purposes only and does not constitute financial advice.