6. Miscalculating the Tax on Your Benefits

A widespread myth persists among younger workers that Social Security benefits are entirely tax-free. They are not. Depending on your overall financial picture, the federal government can tax up to 85% of your benefits. The IRS determines this by calculating your “Combined Income,” also known as Provisional Income.

Combined Income equals your Adjusted Gross Income (AGI) plus your non-taxable interest (such as municipal bond yields) plus exactly 50% of your Social Security benefits. If you file a joint return and your Combined Income falls between $32,000 and $44,000, up to 50% of your benefits may be taxable. If your Combined Income exceeds $44,000, up to 85% of your benefits become subject to federal income tax. For single filers, the thresholds are even more punitive, starting at $25,000 and jumping to the 85% tier at just $34,000.

These thresholds have never been adjusted for inflation since they were enacted decades ago, meaning more retirees fall into the taxation trap every single year. Retirees who blindly pull money from traditional IRAs to fund vacations or home repairs artificially inflate their AGI, inadvertently triggering taxes on their Social Security checks. You can explore the exact calculation worksheets directly through the Internal Revenue Service (IRS) to map out your withdrawals safely.