Social Security has been around for a long time, and as you might imagine, the program is loaded with rules. Some of those rules, however, can work to seniors' advantage.
Unlike Medicare, which doesn't allow enrollees to get coverage until age 65, Social Security offers seniors a range of ages to sign up. You can begin taking benefits at age 62, albeit at a reduced rate, or you can file at a later age and snag a higher benefit for life. In fact, there's technically not even such a thing as a final age to claim Social Security, though there's no financial benefit to signing up beyond the age of 70.
But while Social Security is pretty flexible when it comes to claiming benefits, it's pretty rigid when it comes to imposing taxes on benefits. In fact, the rules surrounding taxes on benefits are extremely outdated, and that makes them overwhelmingly unfair to the seniors impacted by them.
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A low threshold for having benefits taxed
Seniors on Social Security can generally avoid having their benefits taxed when that's their only source of income. But if you have other income sources at your disposal, like savings or earnings from investments, you may end up losing some of your Social Security benefits to taxes.
To see if that will happen, you'll need to calculate your provisional income. That's your non-Social Security income plus any tax-free income you collect (like municipal bond interest) and 50% of your annual Social Security paycheck.
The problem is that taxes on Social Security begin to kick in at low levels of provisional income. Once that number hits $25,000, you could be taxed on up to 50% of your benefits if you're single. And beyond $34,000, you risk taxes on up to 85% of your benefits if you're single.
If you're married, you could be taxed on up to 50% of your benefits if your provisional income reaches $32,000. And beyond $44,000 in provisional income, you risk taxes on up to 85% of your benefits.
Clearly, these thresholds don't give seniors much financial leeway. Most singles need more than $25,000 plus whatever half of their annual Social Security benefit is to live comfortably. And the thresholds for married folks aren't even double, or even close, what they are for singles.
If you're wondering why these thresholds are so low, it's because they were established decades ago and have not been updated since. But that leaves a lot of seniors today at risk of having their benefits taxed.
Consider yourself warned
Not every aspect of Social Security is fair. And when it comes to taxes on benefits, it's easy to argue that the system is downright unjust.
Unfortunately, lawmakers don't seem to be in any hurry to make changes to the current rules. And so if you expect to have a decent chunk of income outside of Social Security in retirement, you might as well brace yourself for the fact that a large portion of your benefits will be taxed.
