Social Security has some rules that can surprise retirees, and one of them can mean big unexpected expenses for seniors.
December Social Security payments, important dates, and updates
Here are important dates for December Social Security payments and the latest updates, including January’s 2.8% cost-of-living adjustment.
Social Security has many complex rules, and it’s important for both current retirees and future retirees to understand them. This is especially true when it comes to rules that can affect the amount of benefits that seniors can take home and spend.
Unfortunately, one Social Security rule can be a big surprise and cost seniors thousands of dollars. Current and future retirees need to be aware of this and be prepared for this so they can take steps to protect their benefits or adjust their budgets if they take a hit.
This Social Security rule may be surprising to many seniors
Social security rules that can be a big surprise for modern people and Future retirees are concerned with taxes on benefits.
Future retirees may think that Social Security contributions are tax-free because they are benefits paid by the government. Many other types of government benefits it’s not Since it is subject to income tax, it is not unreasonable to think that Social Security does not apply to it.
This is especially true since you are paying into the system throughout your career. you already paid Because your paycheck is subject to Social Security taxes, the idea that you’ll be taxed again when you actually receive your benefits may not factor into your retirement planning.
Unfortunately, the rules regarding taxes on Social Security benefits can even be surprising to current retirees. That’s because while the Trump administration touted its success in eliminating taxes on Social Security benefits, the reality is that the tax rules haven’t changed at all.
Instead, the tax rules for Social Security remained unchanged and a new tax credit for older Americans not directly related to Social Security was introduced. However, it is understandable that retirees may be confused about this subject, given some of the statements made by the administration regarding the One Big Beautiful Bill Act passed.
Sadly, if current and future retirees don’t understand the taxes owed to them, they could end up taking home thousands of dollars less in benefits than expected once the IRS takes their share.
What are the rules for taxing Social Security benefits?
Social Security’s tax rules are also surprising for other reasons beyond the simple fact that many seniors may not expect their benefits to be taxed. Another surprise is how low the threshold is when benefits are taxed.
Specifically, up to 50% of benefits are taxable when provisional income reaches $25,000 for single tax filers and $32,000 for married couples filing jointly. Up to 85% of your benefits will be taxed once your preliminary income reaches $34,000 as a single taxpayer or $44,000 as a married couple filing jointly.
Your provisional income is half of your entire Social Security total, plus all of your taxable income and a portion of your non-taxable income. Therefore, even considering that not all income matters, these standards are very low. This is especially true because Social Security benefits weren’t taxed until the 1980s reforms, and at the time only a small portion of high-income people were subject to IRS claims.
However, the problem is that the threshold is not indexed to inflation. It hasn’t increased since it was introduced decades ago. As a result, each year more and more retirees end up paying IRS taxes on a portion of their benefits.
Because there are many other social security rules do Considering inflation, such as the periodic cost-of-living adjustments that retirees receive, the lack of an increase in the tax base in this particular case may seem to make little sense. Unfortunately, this is the reality of Social Security regulations.
Future retirees can prepare and plan to minimize their taxes by investing in a Roth account, since tax-free distributions are not considered when determining whether they reach the Social Security tax threshold.
Those who are currently retired may work with a tax professional to minimize taxes on their benefits, but if you have put your money into a more traditional retirement plan and your provisional income changes are limited, it may be difficult or impossible to avoid taxes entirely.
Still, this tax surprise can cost thousands of dollars, so everyone should know the Social Security tax rules and make financial decisions accordingly.
The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
