The Tax Torpedo: How It Works and How to Avoid It
Many retirees are surprised to find themselves paying more taxes than expected in retirement—especially on their Social Security benefits. One major culprit is the so-called “Tax Torpedo”, a term used to describe the sudden and steep marginal tax rate increase that occurs as Social Security benefits become taxable.
What is the Tax Torpedo?
The Tax Torpedo refers to the sharp rise in marginal tax rates that can occur when a retiree’s income crosses certain thresholds, causing more of their Social Security benefits to become taxable. This can lead to an effective marginal tax rate far higher than their nominal tax bracket.
Here’s why: Social Security benefits are tax-free up to a certain point, but once your “provisional income” exceeds a threshold, a portion of your benefits become taxable—up to 85% of your Social Security income. The process by which benefits phase into taxation causes a compounding effect on the taxes you owe as income increases.
The big issue with the Tax Torpedo is that it turns non-taxable income to taxable income!
Example of the Tax Torpedo
It’s easiest to understand this by seeing it in action.
Let’s assume a couples combined Social Security benefits are $55,000 per year. Additionally, they have a modest $2,500 in taxable interest and $2,000 in tax-free interest per year.
Despite having a total annual income of $59,500, they do not have to pay any annual taxes! That is primarily due to their social security being largely non-taxable.
Provisional Income = $2,000 tax-free interest + $2,500 taxable interest + 50% of $55,000 social security= $32,000
At $32,000, for a married couple, no social security is taxable 🙂
However, as soon as they begin adding additional income, things begin to change. If they added $10,000, this would push their provisional income to $40,000 which results in $5,000 of social security benefits to become taxable.
Remember, the couple is not receiving additional income. Rather, previously tax-free income is now becoming taxable.
So in this case, $10,000 of income was received but you are now being taxed on $15,000!
Here’s what happened.
Base Situation
Additional $10k of Other Income
As you continue to add additional income, more and more of your social security benefit becomes taxable. Here is a table that shows continuing to add $10,000 to their income.
In the last row, they move from $20,000 to $30,000 and their taxable income increases by $18,500 :-/
| Total Additional income | Taxable Social Security | Additional Taxable Income Due to Social Security Tax Formula | Taxable Social Security Added Per $1 Dollar Other Income |
| $0 | $0 | $0 | $0.00 |
| $10,000 | $5,000 | $5,000 | $0.50 |
| $20,000 | $12,800 | $7,800 | $0.78 |
| $30,000 | $21,300 | $8,500 | $0.85 |
For example, if they already had $40,000 in additional, they would be squarely in the 12% overall tax bracket. If you recognize another $10,000, you might think their tax liability on that $10,000 is $1,200.
It’s actually closer to $2,200 or a 22% effective rate on that $10,000. A full 10% above their current bracket.
As the chart below shows, once social security hit’s it’s maximum taxable level (85% of your benefit), the tax rate mirrors the normal bracket rates.
| Additional Income | Total Tax | Effective Tax on Additional $10k |
| $ – | $0 | N/A |
| $ 10,000 | $0 | 0.0% |
| $ 20,000 | $210 | 2.1% |
| $ 30,000 | $2,060 | 18.5% |
| $ 40,000 | $4,215 | 21.6% |
| $ 50,000 | $6,435 | 22.2% |
| $ 60,000 | $8,649 | 22.1% |
| $ 70,000 | $9,849 | 12.0% |
| $ 80,000 | $11,049 | 12.0% |
What to Do about the Tax Torpedo
The first step to navigating the tax torpedo is just understanding it. If you made it this far, I hope you have at least a recollection of what it means. (More Income = More Taxable Social Security = Higher Tax Bill)
Managing the tax torpedo is about proactive planning and thinking about how to structure your sources of income – not just now but in the future as well.
- Roth Conversions can help reduce your taxable distributions in the future particularly when you hit RMD age and while you’re claiming social security.
- Strategic Social Security Claiming to allow more tax bucket management.
- Tax Efficient investments where you can control when income is recognized in taxable accounts.
- Proactive tax bracket planning to maximize lower brackets.
- Tax Efficient Withdrawals from retirement buckets.
The Tax Torpedo highlights the complexity of retirement tax planning. A simple increase in income—whether from a part-time job, IRA withdrawal, or RMD—can have a ripple effect that increases the taxation of Social Security benefits and your overall tax liability. Fortunately, with proactive planning, you can smooth income sources, reduce surprises, and preserve more of your retirement income.
For many retirees, understanding the torpedo is the first step. The next step is crafting a coordinated income strategy that blends Roth conversions, Social Security timing, and tax-efficient withdrawals—ideally years before the torpedo even activates.