Social Security will pay about $ 1 trillion in benefits in 2020, sending money to about 65 million Americans.
However, not all beneficiaries receive to keep all their money. In fact, Social Security retirees will lose a collective total of $ 38.9 billion this year. This is why.
It has to do with a change made in 1983
Recipients of Social Security retirement benefits will lose a small fortune in 2020 because they will have to pay taxes on their benefits.
The 2020 Social Security Trustee report estimates that the program will raise $ 38.9 billion in tax revenue in 2020. This money will serve as a major source of funding, but it comes directly from the pockets of current retirees who lose billions in benefits. .
Not all retirees pay the same tax rate, so some retirees bear the burden of supporting the program much more than others. A report by the League of Senior Citizens found that about half of all Social Security retirees paid taxes on their benefits in 2019, which was the same amount as the year before.
Originally, these taxes were not applied to retirement benefits, but were introduced in 1983 through amendments intended to shore up the finances of the program. And when taxes were first introduced, it was largely wealthy Americans who had to bear the brunt. But the thresholds at which taxes are collected were not indexed to inflation, and are now not very high.
For individual taxpayers, taxes are due on up to 50% of annual profits once their countable income reaches $ 25,000. Married taxpayers owe taxes with a combined countable income that starts at just $ 32,000. And for singles with a countable income of $ 34,000 or married taxpayers with $ 44,000, up to 85% of the benefits are subject to taxes.
However, you will note that these limits apply only to “countable” income, which includes half of your annual Social Security benefit plus other taxable income. Therefore, the threshold at which you begin to lose your benefits is a little higher than it seems at first glance. Still, millions of seniors are deprived of nearly $ 40 billion in hard-earned retirement benefits in 2020.
How can you avoid taxes on your Social Security benefits?
Being forced to pay federal taxes on Social Security benefits can be painful, especially since it is you retirement money you earned by paying taxes in the system.
But the good news is that many current workers can take a simple step to reduce or avoid taxes. They can invest in a Roth IRA or Roth 401 (k). If you do, the money you withdraw from your retirement account as an older person is not considered countable income to determine if your benefits are taxable. You can withdraw as much money from these accounts as you like without worrying that your benefits are taxable.
Current retirees also have the option of converting their traditional 401 (k) or IRA into a Roth by doing a Roth IRA conversion, but this has important tax implications, so it may be best to speak to a financial professional before deciding whether to do so. It is the right move.