Up to 85% of Your Social Security Benefit Could Be Taxable Because of This Flawed Rule

Quick Read

• Social Security tax thresholds set in 1983 were never inflation-adjusted, expanding the share of retirees owing tax from under 10% to over 50%.

• Single filers above $34,000 and joint filers above $44,000 in provisional income owe federal tax on up to 85% of their benefits.

• Using Roth accounts or carefully structuring withdrawals can keep provisional income below the thresholds and eliminate taxes on Social Security benefits.

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When you pay taxes to earn Social Security benefits in the future, you may not realize you could be taxed on those benefits when you receive them in retirement. Unfortunately, that’s exactly what is happening to a growing number of retirees. In fact, up to 85% of your entire Social Security benefit could be subject to income tax on the federal level. And the rule that puts this tax in place is actually pretty flawed.

Here’s why there’s a big issue with the rules for taxes on Social Security benefits.

These rules for taxing Social Security benefits have one big flaw

It’s important to understand the rules that control when Social Security benefits are taxed in order to understand the flaw in the rules. Here is when the law says you will have to pay the IRS tax on your Social Security payments.:

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• If you are a single tax filer, you will owe tax on up to 50% of benefits once your provisional income hits $25,000, and you will owe tax on up to 85% of benefits once your provisional income hits $34,000.

• If you file taxes as married filing jointly, you will owe tax on up to 50% of your benefits once your provisional income hits $32,000, and will owe tax on up to 85% of your benefits once it hits $44,000.

Provisional income is half of all Social Security benefits, some non-taxable income, like interest on municipal bonds, as well as all taxable income. Even with this definition that doesn’t count all your Social Security income, these thresholds are very low. And that’s the flaw. Taxes were first introduced in the 1983 reforms to Social Security, and the second change, adding the tax on up to 85% of benefits, occurred in the 1990s. And these income thresholds were set at that time and have not increased since — despite the fact that the price of everything else is far higher.

The problem is that the thresholds were not indexed to inflation. So while fewer than 10% of retirees originally paid tax on benefits, over 50% are now subject to the tax under current rules.

Now, the One Big Beautiful Bill Act did introduce a new senior tax deduction that brings taxable income down below these limits for many retirees, but the underlying rules on when benefits are taxed did not change. The OBBBA also did not help all retirees collecting Social Security, as high earners and those under 65 are not eligible for the new deduction. Plus, the deduction is only valid until 2028 anyway, so soon a growing number of retirees are going to face these taxes as benefits naturally increase over time and as the deduction disappears.

Can you avoid taxes on Social Security benefits?

Being taxed on  Social Security benefits means this money doesn’t go as far in helping support you. You can try to avoid this tax by keeping your provisional income below the allowable limits. This could mean structuring your withdrawals carefully, or investing a substantial portion of your retirement savings in Roth accounts so distributions won’t count in taxable income. A financial advisor can help you to decide if this is the right course of action and to explore what strategies, if any, you should try to avoid owing tax on your Social Security.

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