Tax Time Bomb 4: How Social Security Taxes Can Surprise Retirees

In this episode of The Divorce the IRS Podcast, we continue our series on the retirement tax time bombs that can quietly increase your tax bill later in life.

Today’s focus is Tax Time Bomb #4: Social Security taxation.

Many retirees assume that once they begin collecting Social Security, the income will simply supplement their retirement savings. But depending on how your income is structured in retirement, up to 85% of your Social Security benefit may become taxable.

The key factor behind this surprise is something called provisional income. When the IRS calculates provisional income, it includes sources such as withdrawals from traditional IRAs and 401(k)s, investment income, rental income, and even half of your Social Security benefit itself. If that number exceeds certain thresholds, your Social Security benefits may suddenly become taxable.

In this episode, we walk through how these rules work, why many retirees accidentally trigger Social Security taxes, and how different retirement income strategies—particularly the use of Roth accounts—can potentially help reduce or even avoid this tax time bomb.

What You’ll Learn in This Episode

• Why Social Security benefits can be taxed in retirement
• What provisional income is and how the IRS calculates it
• The income thresholds that trigger Social Security taxation
• How withdrawals from traditional retirement accounts can increase your tax bill
• Why Roth IRA withdrawals do not count toward provisional income
• A real example showing how retirees can accidentally trigger thousands in Social Security taxes
• The latest discussion around potential changes to Social Security taxation
• How proper retirement planning can help you avoid this tax time bomb

Understanding how Social Security interacts with the rest of your retirement income is a critical part of building a tax-efficient retirement strategy.

Visit the resources page at divorce-the-irs.com to access tools and calculators that can help you estimate potential Social Security taxes.

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Transcript

SPEAKER_00 0:01

Welcome to the Divorce the IRS Podcast, the retirement income planning podcast designed specifically for those who want to pay the least amount of taxes possible and build a retirement income that lasts. Inspired by the best-selling book, Divorce the IRS, you get to go behind the scenes with financial planner, author, and speaker Jimmy Miller. Learn how to set yourself up to pay the least amount of taxes in retirement when you'll need your money the most. And now, here's your host, Jimmy Miller.

SPEAKER_01 0:27

Welcome. Welcome to episode 13 of the Divorce the IRS podcast. Today we continue the discussion of tax time bombs that go off in your retirement with tax time bomb for Social Security taxes. Let's dive right in. Now let's stick with the idea from the last episode that you are now retired. You've come to terms with the realization that you only own about 80% of your tax-deferred retirement accounts, and that you're now in a partnership for life with the IRS. You're reluctantly paying taxes on everything you take out of those accounts as income, and it's a lot more than you ever thought a retiree would pay. Now it's time to boost your retirement income with Social Security. You won't have to rely so heavily on your own retirement accounts, and maybe it can help you pay less tax. So you paid into the system for all those years with taxes, right? Now it's time for that to pay off. However, when you get your first Social Security check, you weren't counting on another tax time bomb going off. That's right. You built this benefit throughout your entire career by paying a lot of taxes for it. And now the IRS is going to tax your benefit. Depending on whether you're single or married, there's a limit on the amount of provisional income you can take during retirement before your Social Security gets taxed. This means that if you take money out that is considered provisional income, it will be included in a calculation to determine how much, if any, tax you will owe on your Social Security income. Provisional income generally includes half of your Social Security benefit and any distributions from your tax-deferred buckets, such as your traditional IRA and traditional 401k. It also includes any interest or growth from your tax me now bucket investments, which are reported on your 1099 forms, such as CDs and savings accounts at your bank. Provisional income also includes income from any employment, including self-employment. It includes interest and capital gains from municipal bonds as well. And finally, it also includes all rental income from rental or investment properties you may have. Now the IRS will add this all up. And if you're over the threshold set by the IRS, you'll be taxed on your Social Security at your highest marginal tax rate. The thresholds are not that high either. If you're single and your provisional income is greater than$25,000 in 2026, you will owe taxes on your Social Security. Married couples start paying taxes on Social Security once their combined provisional income reaches$34,000. You can find an online calculator to help determine how much Social Security tax you may owe, and there is a link on the resources page at divorce-the-IRS.com. Now the good news is that only 85% of your Social Security benefit can become taxable. The IRS will always give you at least 15% of your benefit tax-free. Let's take a look at an example and consider Bill and Sally. Bill and Sally have a combined Social Security income of$50,000. In order to meet their lifestyle needs, they would like to take an additional$80,000 a year from their IRAs. To figure out their provisional income, we take half of their Social Security benefit, which is$25,000, and add it to the$80,000 they withdraw from their IRAs. This makes Bill and Sally's provisional income$105,000. And because this is over the maximum threshold of$44,000 for married couples, they now owe taxes on$85% of their Social Security income at their highest marginal tax rate. Thus,$85% of their$50,000 of Social Security is$45,500. This is piled right on top of their other income, which is the IRA withdrawal of$80,000, and is taxed at 22%, the 2026 tax rate. Bill and Sally would owe almost$10,000 of tax on just their Social Security simply because they took too much out of their pre-tax IRAs and triggered that provisional income threshold. Now had Bill and Sally had Roth IRAs instead, they could have taken out$80,000 without tax and without the withdrawal accounting towards provisional income. Had they done this, their provisional income would have only been half of their social security benefit, the$25,000. This would have been under the provisional income threshold for making their Social Security benefit taxable as a married couple. And they would have gotten all of their Social Security tax-free. They would have also gotten all the money out of their Roth IRA tax-free as well. They would have effectively divorced the IRS and been in a 0% tax bracket in retirement, even with$130,000 of total income, which is$80,000 from their Roth accounts, plus$50,000 in Social Security benefits. It's important to understand that one of the major benefits of a Roth IRA is that the income you take from it in retirement will not be counted as provisional income. So not only will you pay no tax on Roth withdrawals, you won't be adding to the provisional income total that can trigger other taxes, sometimes a lot of taxes, like on your Social Security income. Provisional income can also trigger other taxes in retirement, as we'll explore in the next episode. Now, one of the campaign promises that President Trump ran on in 2024 was the elimination of Social Security taxes for the roughly 68 million U.S. households receiving a monthly benefit check. This is also something that I'm asked about often now that President Trump is back in office. Although this sounds wonderful and exactly like something you would hear from a political candidate like Trump, the reality of making this happen for Americans was a bit challenging. The main issue with making this happen is the fact that about 50% of current Social Security recipients already don't pay tax on their Social Security. This fact shows that the majority of those who would actually benefit from an elimination of Social Security taxes are higher earners, those with other sources of income in retirement that push them over the provisional income thresholds. Thus, eliminating the Social Security tax may be seen as only helping wealthier retirees. Many claim that this would actually hurt lower demographics as well, even more in the long run, as the stress on the Social Security Trust Fund would increase even more should fewer taxes flow into it. So, why do so few Americans pay tax on their Social Security? Well, as we discussed earlier, Social Security taxation is based on a person's provisional income. If Social Security is the only or main income one has in retirement, then half of that benefit, which is what counts towards provisional income, is seldom high enough to trigger the tax on the benefit. The unfortunate truth is that many retired Americans don't have much retirement savings. Social Security makes up more than 90% of the retirement income for about 12% of men and 15% of women. And Social Security makes up more than 50% of retirement income for about 37% of men and 42% of women. Hopefully, by saving your money and using the concepts in this podcast, this won't be you. Here are some other things to know about Social Security. The maximum monthly benefit one could receive from Social Security in 2025 was dependent on when you claimed. For example, if you retired at your full retirement age in 2025, your maximum benefit would have been$4,018. However, if you start your benefit at age 62, which is the earliest age allowed, your maximum benefit would have been reduced to$2,831. And if you wait until you're 70, which is when the benefit stops growing and there's no benefit to waiting any longer, the maximum benefit is$5,108 per month. These are the maximum benefits one can achieve. Now, last year in 2025, the average Social Security monthly benefit was$2,08. And almost 68 million Americans received a benefit, totaling about$1.7 trillion paid during the year. Now, going back to President Trump's pledge to get rid of Social Security taxes, ultimately he was unsuccessful at getting this passed as part of the One Big Beautiful Bill Act, and the rules around Social Security taxation are still in place, as they were before President Trump was elected. But to help with this matter, the One Big Beautiful Bill Act did raise the standard deduction for Americans over the age of 65, giving each American over 65 an additional$6,000 of tax-free income in retirement, so$12,000 per married couple. This extra tax-free income, according to President Trump, is designed to help offset Social Security tax, but in reality, it just helps anyone over 65 with their tax bill, which is a good thing. The extra$6,000 of tax deduction for those over 65 is set to expire with Trump's current term in 2028, as the law stands today. We'll have to wait and see if Congress will make this tax cut permanent. See the resource page at divorce-the-IRS.com for more details about tax on Social Security and how provisional income works. This is yet another tax explosion that is preventable with comprehensive financial planning and the utilization of tax-free strategies earlier in life. You see, the money you would draw from tax-free accounts isn't just tax-free. It isn't included in the calculation that can make your Social Security taxable. In other words, it isn't considered provisional income. So you can take as much income from tax-free accounts as you'd like without ever worrying about making your Social Security taxable and exploding this tax time bomb on yourself. Once you're aware of this, you can consider another tax that most people never think of: Medicare premiums, which we're going to explore in the next episode.

SPEAKER_00 10:49

Want even more ideas, tools, and resources on how to navigate your financial life? Check out all the resources on the Divorce the IRS website at divorce-the-IRS.com or the Bayabub Wealth website at bayablewealth.com and subscribe to the blog to stay up to date on issues affecting retirement income planning. Don't forget to subscribe to the podcast so you never miss an episode. Bayabub Wealth and Bayabut Wealth Abroad are DBAs of Bayabwealth LLC, a Florida registered investment advisor. This podcast is designed for general education purposes only and shouldn't be taken as legal investment or tax advice. You should seek out a qualified tax professional or licensed financial advisor to determine what is best for your personal situation.