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More Than 60% of Americans Are Worried About Social SecurityTaxes. They're Right to Worry

By Christy Bieber – Jul 30, 2020 at 6:30AM

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Will you lose a big portion of your benefits to taxes?

For Americans who work hard all their lives and pay Social Security via payroll taxes, it can be frustrating to get to retirement and find out benefits are taxable too.

While not everyone pays taxes on Social Security benefits, most future retirees are concerned about the impact their tax obligations will have on the amount of money these benefits will provide -- and they're right to worry, as it's likely more retirees will be subject to taxes over time. 

Man looking at 1040 form with laptop.

Image source: Getty Images.

Americans are justifiably worried about taking a tax hit that reduces their Social Security income

According to research from Nationwide, 64% of pre-retirees have expressed concern about how taxes will affect their Social Security benefits, indicating they want to learn more about the impact IRS bills will have on this important source of retirement income. 

The good news is that not everyone pays taxes on their Social Security benefits. In fact, you won't take a tax hit until your countable income is at least $25,000 as a single tax filer or $32,000 as a married joint filer. Countable income is half your Social Security benefits plus other taxable income, as well as some sources of non-taxable money such as interest from municipal bonds.

If your countable income is between $25,000 and $34,000 as a single filer, you'll be taxed on up to 50% of benefits -- and once it's above that, you'll be taxed on up to 85% of benefits. And for married joint filers, you'll also pay taxes on up to 50% of benefits with an income between $32,000 and $44,000 and then owe on up to 85%. 

The problem is, at these current thresholds, around 50% of retirees owe taxes on their Social Security -- and that percentage will only grow over time. That's because the $25,000 and $32,000 thresholds at which benefits become taxable aren't indexed to inflation, so they don't automatically rise -- and lawmakers haven't raised them. The fact these thresholds aren't adjusted due to rising prices is the reason why the tax on the benefit, which once affected just 10% of retirees, now applies to around half. 

Thanks to inflation, more and more future retirees are going to have an income that makes their benefits taxable. If you're a ways away from retirement, that means you'll need to plan to keep less of your Social Security benefits in the future unless you take action to prevent that from happening. 

You can reduce the taxes you'll owe as a retiree

If you're one of the majority of Americans looking ahead to retirement and worried about how taxes will affect your Social Security benefits, there are steps you can take.

One of the best options is to invest in a Roth IRA. Distributions aren't taxable (provided you fulfill certain requirements) or considered countable for purposes of determining if Social Security benefits are taxed. If you put your money into this type of retirement account, you won't get a tax break in the year you make the contributions but can withdraw as much as you want later in life without worrying about making more of your Social Security benefits taxable. 

There are also a small number of states that tax Social Security benefits in least some circumstances. If you live in one, planning to relocate in retirement may be smart sto avoid your benefits from being eaten away by both federal and state taxes. You have plenty of options for where to live to elude a portion of your retirement money to taxes, so start researching them early to find the right new home for your later years. 

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