Millions of older Americans receive a Social Security payment each month. And for many people, those payments constitute the bulk of their retirement income.

If you’re someone who lives mostly on Social Security, you may be in a position where you get to get keep those monthly benefits in full. But many seniors are forced to pay federal taxes on their Social Security benefits in retirement. And that’s a rule that a lot of people find overwhelmingly unfair.

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Are you getting double taxed?

Social Security’s primary source of funding is payroll tax revenue. You probably remember that when you collected your paycheck from work each month, a portion of it went toward FICA, which stands for the Federal Insurance Contributions Act. FICA helps fund both Social Security and Medicare.

The problem is that depending on your income, you may also be paying taxes on your Social Security benefits as a retiree. And in a way, that’s double taxation. You paid taxes on your wages to qualify for Social Security, and now you’re paying taxes on the benefits you qualified for.

Making matters worse is that the income thresholds at which Social Security benefits are taxed are fairly low. Taxation of retirement benefits hinges on combined income, which is calculated as follows:

• 50% of your annual Social Security benefit
• Your adjusted gross income (AGI)
• Non-taxable interest income you receive, such as municipal bond interest

Once combined income reaches $25,000 for individual tax-filers or $32,000 for joint tax-filers, Social Security benefits can be taxed at the federal level. These thresholds were established decades ago and have not been adjusted for inflation since.

Avoiding taxes on Social Security benefits

It’s possible — though not necessarily easy — to avoid taxes on Social Security benefits. One option is to house your retirement savings in a Roth account, since withdrawals from an account of that nature won’t count toward your AGI.

But Roth accounts aren’t a fit for everyone. If you earn too much to contribute to a Roth IRA during your working years, there’s the option to do a conversion ahead of retirement. But that could leave you on the hook for a whopper of a tax bill, and it may not even make financial sense given your pre- versus post-retirement tax bracket.

So all told, paying taxes on Social Security benefits is something a lot of moderate earners may have to resign themselves to. And that’s something you should plan for accordingly. It’s bad enough that taxes on Social Security benefits exist, but an even worse situation is to let them throw your retirement finances out of whack.

Of course, it’s worth noting that President Trump has said he’ll seek to put an end to taxes on Social Security for retirees. But whether that plan comes to fruition is up in the air. So for now, it’s best to run the numbers and see if taxes on your Social Security benefits are likely, and then set up your retirement budget to account for that potential loss of income.

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