Will You Have to Pay Taxes on Your Social Security Benefits? Chances Are, Yes. Here's Why.

If you're working now, you're no doubt losing a chunk of your salary to Social Security taxes. But there's good news. Once you retire, you'll most likely be eligible for a monthly benefit. So while it stinks to have to pay into the program, you at least get something out of it.

But don't assume you'll get to collect those monthly Social Security checks tax-free. There's a good chance you'll end up having to pay taxes on your Social Security benefits in retirement, especially if you're still many years away from being able to file. Here's why.

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An outdated rule that hurts a lot of people

There are a good number of Social Security recipients who do not pay taxes on their benefits. Whether those taxes apply depends on something called combined income.

Combined income is the total of:

• Your adjusted gross income
• Your non-taxable interest income (for example, interest from municipal bonds)
• 50% of your annual Social Security benefits

If you file taxes as an individual, a combined income above $25,000 will mean having to pay taxes on some of your Social Security benefits. If you file a joint tax return, a combined income above $32,000 puts you in the same boat.

If these thresholds seem almost ridiculously low to you, it's because they are. And it's also because lawmakers established them decades ago and have not adjusted them for inflation.

But here's the thing. Social Security benefits are adjusted for inflation. Each year, benefits are eligible for a cost-of-living adjustment.

The combined income thresholds are not inflation-adjusted. And if lawmakers don't make a change to that rule, then there's a good chance you'll end up having to pay taxes on your Social Security benefits once you retire. That's because over time, Social Security benefits are going to increase.

The average monthly benefit today is a little under $2,000. But if you're not retiring for a couple of decades, by the time you're set to collect Social Security, the average monthly benefit could be $2,500, or $3,000, or more, depending on the rate of inflation.

So all told, if Social Security benefits keep going up but the combined income thresholds remain flat, a growing number of people are likely to be liable for taxes on those monthly payments. Eventually, you might be one of them.

One way to (potentially) avoid taxes on Social Security benefits

The idea of paying taxes on Social Security can be particularly upsetting because the whole reason you're eligible for those benefits is through the taxes on wages you already paid. But there may be one tactic you can employ to get out of having your benefits taxed in retirement.

If you keep your retirement savings in a Roth IRA, withdrawals from that account won't be added to your adjusted gross income. That could keep you below the combined income threshold at which taxes on Social Security apply.

But while this tactic might work in the near term, it may not hold up as well in the future as Social Security benefits rise. So taxes on Social Security are an expense you may need to plan for.

To be clear, a big reason why lawmakers have not adjusted the combined income thresholds could be that they want more seniors paying taxes on their Social Security. Those taxes help fund the program, and it's money Social Security desperately needs.

So even though it may seem gloriously unfair that the combined income levels have not budged in decades, that's intentional. And it means you can't count on those thresholds changing at any point in the future, either.

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