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Earlier this week, we talked about Social Security and Medicare taxes ? including how much of your income they eat up.

But just as a reminder: Social Security alone takes 12.4% of every American's income up to a total limit of $15,921.60 in 2018.

That's a lot of money.

Of course, many people are okay with the whole process because they expect to collect back out of the system when they retire.

There's just one other dirty little secret that millions of Baby Boomers are now discovering the hard way?

Your Social Security benefits themselves can end up subject to income taxes.

Take a step back and think about that.

You pay into the system through dedicated taxes for several decades…

The whole purpose is funding a program that will eventually make payments back out to you…

Then, when it's time to finally collect, the government taxes the distributions all over again!

This is absolutely crazy.

Lawmakers love the idea, of course.

Why?

Because it allows them to effectively reduce benefits being paid to millions of Americans without having to actually characterize it that way.

Indeed, I fully expect this to get worse as politicians find ways to further reduce the amount of money our ailing Social Security program hands out.

It is ALREADY being done to more and more Americans each and every year.

I suspect many new retirees were shocked to find that out as they completed their 2017 tax returns.

Here's how the current law works?

You could owe federal income taxes on as much as 85% of the Social Security benefits you receive.

It all depends on how much ?provisional income? you earn during retirement.

To figure this number out, you add up your adjusted gross income (not including S.S. payments), additional tax-exempt interest you'll collect, plus half of your S.S. benefits.

If you file a joint return:

• Your benefits are tax free if your provisional income is less than $32,000?
• No more than half your benefits can be taxed if your provisional income is between $32,000 and $44,000?
• And if your provisional income exceeds $44,000, it's almost certain that 85% of your benefits will be taxed.

There are several things to note here:

First, if you file single or head of household, these thresholds go DOWN significantly ? i.e. taxation begins at provisional income of $25,000.

Second, in that middle range the actual methodology and exact amounts get tricky but the end result is that you will likely owe a good amount of money back to Uncle Sam.

Third, these thresholds have NOT been getting readjusted for inflation!

I can't stress the last point enough.

These numbers were originally established back in 1984.

It is now 34 years later and they haven't been adjusted. And as you know, $32,000 a year isn't all that much money these days.

So what was initially designed to target a small segment of the population now blankets a large swath.

The lack of inflation adjustment is the primary reason more and more retirees are getting snagged every year.

Just consider:

The Congressional Budget Office said 39%, or 16.9 million, of Social Security beneficiaries had some amount of their benefits taxed back in 2005.

More recent numbers from the IRS and other sources now suggest it's roughly two-thirds of all Social Security beneficiaries!

I'm going to tell you flat out that I don't think this is right.

I believe the taxation of Social Security benefits punishes people who have planned adequately for retirement ? along with large groups of regular Americans who happen to have pensions or other well-deserved retirement income sources ? and only raises more questions about the overall fairness of the current Social Security system.

But again, based on the rapidly deteriorating condition of our nation's retirement system, I think this is just the beginning of a larger trend.

Not only will lawmakers allow inflation to bring more Social Security benefits into the taxation loop but it is also quite likely that they will eventually expand the concept or the percentages to further reduce the total amount of money being paid out.

So is there anything you can do to avoid having your Social Security benefits taxed?

You may be able to shift around certain retirement distributions and use certain types of investment accounts to control how much provisional income you receive in any given year.

I would recommend working with a tax advisor or financial planner to figure out what's right for your particular situation, but here are a few starting points:

#1. Consider a Roth IRA over a traditional IRA since the former's distributions are not taxable income.

#2. Take distributions from your retirement accounts in such a way that they only push you into the taxable range every other year.

#3. And be careful how and when you sell stocks, real estate, or other major assets.

To a richer life,

Nilus Mattive
Editor, The Rich Life Roadmap

The post A Slap in the Face to Millions of Boomers appeared first on Daily Reckoning.