Eliminating the windfall elimination provision (WEP) and government pension offset (GPO) from the Social Security system has allowed certain retirees to receive more in their monthly Social Security payments, but experts say some are caught off guard by the downside.
The WEP and GPO were eliminated when former President Joe Biden signed the Social Security Fairness Act (SSFA) into law on Jan. 5.
“The tax impact of increased Social Security benefits under SSFA hasn’t been talked about nearly enough,” MDRN Capital founder and CEO Aaron Cirksena told NTD on May 12. “Many retirees saw the headline about getting more in benefits and didn’t realize it could also mean more in taxes.”
Although the GPO reduced Social Security spousal or survivor benefits by two-thirds for those who also received a pension from a non-covered government job, the SSFA allows anyone with a pension to also receive Social Security benefits, regardless of the amount of money the pension pays, which means more income for high-earning individuals.
This sounds like good news, except that if Social Security income plus other sources like pensions, investments, or part-time work increases by more than $34,000, then up to 85 percent becomes taxable.
“It’s not a new tax rate; it’s just that more of your benefits get pulled into the taxable column,” Cirksena said. “The more income you stack on top of Social Security, the more of it gets exposed to federal taxes.”
However, those who are filing jointly and have income that’s beyond $44,000 can expect a tax burden of up to a whopping 85 percent.
To keep taxable income low enough to reduce how much of their Social Security is taxed, joint filers should consider Roth conversions and qualified charitable distributions, according to Cirksena.
“What it means is that up to 85 percent of your Social Security income can be counted as taxable income,” he added. “So if you’re in a 22 percent tax bracket, it’s 22 percent of that 85 percent, not 8 5percent gone.”
Life insurance agent Yehuda Tropper of Toms River, New Jersey, advises considering staggering withdrawals from retirement accounts.
“If you need $40,000 for a major expense, withdraw $20,000 in December and $20,000 in January, which are different tax years,” Tropper told NTD on May 13. “That keeps each year's taxable income lower than if you took out the full $40,000 in a single tax year.”