The Hidden Tax Cost of Delaying Social Security

You've probably heard the most common Social Security advice out there today, which is to wait until 70 to claim. The reasoning is sound, as this can result in a bigger check, but the strategy can backfire tax-wise in ways seniors may not expect.

If you're not already thinking about how retirement benefits affect future tax brackets, now's a good time to map it out. Since these thresholds haven't been adjusted for inflation, more retirees face issues each year.

We go into more detail on provisional income to determine how much of your benefits will be taxable and what you can do to have a stress-free retirement.

Why delaying Social Security isn't always a tax win

Delaying increases your checks compared to taking Social Security early, around 8% per year past the full retirement age (up to age 70). Some consider it a guaranteed return if you plan on living into very old age.

The hidden tradeoff here is that larger checks also increase taxable income. So, if you get pushed into the next tax bracket, you could pay more in taxes than you expect. Delaying isn't necessarily wrong, but advice suggesting you do so may not consider your entire tax picture, especially if it ignores how withdrawals, RMDs, and investment income work together.

This may not be an issue if you don't expect to make much in late retirement, but many financial plans ignore tax interaction with other income sources. Since you want to balance getting the most benefits with tax efficiency, it's worth examining carefully.

How Social Security taxes work

The IRS uses provisional income to determine what's taxable. It's calculated by adding your adjusted gross income (AGI) and any tax-exempt interest, plus half of your Social Security benefits. Then, it taxes based on thresholds:

For single filers, this is:

• Below $25,000: no tax on benefits
• $25,000-$34,000: up to 50% taxable
• Above $34,000: up to 85% taxable

For married filers, this is:

• Below $32,000: no tax on benefits
• $32,000-$44,000: up to 50% taxable
• Above $44,000: up to 85% taxable

In this case, "up to 85% taxable" means that portion is subject to income tax. It doesn't mean that it's taxed at 85%.

Also, because these thresholds were set in the 80s and 90s and haven't been adjusted for inflation, they catch more people today than they might have in the past. Where only higher-income seniors would have had to worry about taxation, it now affects middle-income households, too.

Bigger benefits can trigger higher taxes

Here's a look at the chain reaction that often occurs. It starts by delaying benefits for a larger monthly Social Security payment. Then, the IRS counts half of that higher benefit toward provisional income. That higher provisional income can push you past the $34,000 or $44,000 threshold.

Once you cross the threshold, more of your Social Security benefits become taxable. Plus, you have other income, like IRA withdrawals, that get stacked on top. You end up with a tax snowball where each additional dollar of income causes up to $0.85 of your Social Security to become taxable.

So, now you're being taxed on more than just the new income. For retirees in the 22% income tax bracket, this can push marginal tax rates to 40.7%, effectively counteracting the benefit of the larger monthly benefit.

Claiming at 67 vs. 70

Here's a look at two examples that illustrate the concept. Consider a married couple, both retired with the same savings of a traditional IRA and a taxable brokerage account.

In scenario A, they claim at 67 and have:

• $30,000/year in combined Social Security
• $35,000 from IRA withdrawals
• $5,000 in investment income

Their provisional income stays closer to the $44,000 household threshold, and fewer benefits get taxed.

In scenario B, they wait until 70 to claim and have:

• $40,000/year in Social Security
• $35,000 from IRA withdrawals
• $5,000 in investment income

Now, half of the larger benefit adds more to provisional income, and it's clearly above the $44,000 threshold. Up to 85% of Social Security becomes taxable, and IRA withdrawals may be taxed more heavily, too. The couple here gets a bigger Social Security benefit, but loses more of it to taxes.

The new senior deduction helps (somewhat)

A temporary additional $6,000 standard deduction is in effect for older taxpayers from now until 2028. It lowers taxable income overall, which can reduce the total tax owed.

It does not, however, reduce provisional income, which is what determines how much Social Security can be taxed. You might pay slightly less in overall taxes, but still have up to 85% of your benefits counted as taxable income, depending on how much you get. It's helpful at the margins but doesn't solve the underlying taxation concern.

How to reduce the tax impact

Ways to avoid paying more taxes than necessary include:

Roth conversions early in retirement: By converting portions of a traditional IRA to a Roth before you claim Social Security benefits, you'll pay taxes at lower rates now. You'll also reduce future RMDs and provisional income.

Qualified Charitable Distributions (QCDs): After age 70 1/2, you can donate directly from your IRA to a qualified charity. This counts toward RMDs but is excluded from taxable income.

You can also claim Social Security earlier or later based on your full income picture instead of just the benefit size. Remember, the goal isn't to avoid taxes altogether, but to smooth them out over time and avoid expensive surprises later in life (when you have less ability to earn income).

Bottom line

When you delay Social Security benefits, you increase your monthly payment amount. But this also increases the amount of that benefit that could eventually be taxed. This isn't necessarily a mistake, but failing to plan for how you'll handle it could be.

By optimizing for the biggest check rather than the highest after-tax income, you risk giving more of your benefit right back to the government. A coordinated withdrawal and claiming strategy can often give you better real-world results than simply waiting until 70, and it better reflects the nuances involved in making smart retirement choices.

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