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Nearly Half of Retirees Aren't Receiving Their Full Social Security Benefits -- Here's Why

By Christy Bieber - May 7, 2021 at 8:20AM

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Are you at risk of becoming one of them?

When you're nearing retirement, it's essential to determine how much income Social Security will provide. These retirement benefits are guaranteed to last for life and will probably be an important source of funds once you're no longer getting a paycheck.

Unfortunately, many retirees don't take into account the fact they don't get to keep all of their benefits. In fact, close to half of all retirees lose some of this retirement income for one simple reason. Here's what it is. 

A Social Security card laying on paper bills and coins

Image source: Getty Images.

Why millions of retirees lose part of their Social Security checks

The reason so many retirees lose part of their Social Security checks is because the IRS takes a cut.

In fact, according to research from the Senior Citizens League, around 48% of retirees report they owe taxes on at least part of their Social Security checks.

This can come as a huge shock, because benefits didn't used to be taxable. Until the law changed in the early 1980s, retirees received Social Security benefits free and clear of any obligations to the IRS. 

Under the current rules, however, many people lose part of their benefits to federal taxes, and a growing number of seniors in the future won't be able to keep all of their checks. 

When do Social Security benefits become taxable?

The rules for when Social Security benefits become taxable are a little complicated. That's because whether you're taxed by the IRS or not depends on something called your provisional income.

Your provisional income is calculated by adding in half your Social Security benefit, all taxable income, and some non-taxable income such as interest you receive from muni bond investments. Any distributions from Roth accounts do not count.

Once you've added up your provisional income, see if it's above the threshold at which benefits become taxable. That depends on your filing status:

  • If you file as single, you can be taxed on up to 50% of your benefits once your provisional income reaches $25,000. After your provisional income hits $34,000, you'll be taxed on up to 85% of your benefits.
  • If you're a married joint filer, you can be taxed on up to 50% of your benefits with provisional income of $32,000, and up to 85% of benefits once your provisional income hits $44,000. 

Both current and future retirees also need to be aware of an unfortunate fact about these thresholds: They aren't indexed to inflation. That means they stay the same year after year, even as incomes rise and the value of each dollar falls.

Because of this, a growing number of seniors are going to start to lose part of their benefits to the IRS since their provisional incomes will climb above this threshold -- even though their buying power definitely won't classify them as the type of wealthy Americans originally supposed to be subject to Social Security taxes. 

It's also worth noting that a small number of states also tax Social Security benefits, so if you live in one of them, you'll need to know your state's rules too. 

It's important to plan for the slice that taxes could take out of your benefits so you don't anticipate having more retirement money available than you actually do. Current retirees also need to make sure they're paying their taxes on time. And future retirees may want to think about contributing to Roth accounts so they can withdraw money without having the IRS take more of their Social Security checks. 

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