by Paul Hubbard III
An increasing number of Americans are experiencing what they feel is “double taxation when it comes to their Social Security benefits. Some advocates are calling for an adjustment to current thresholds.”
As initially envisioned, Social Security was a safety net that its creators believed should be tax-free. After all, they reasoned that since retirees pay FICA taxes with after-tax dollars, there should be no further taxes. Indeed, this was the case until 1984.
In the early 80s, concerns mounted that Social Security was in trouble and could run out of cash. Under public pressure, Ronald Reagan appointed a group known as the National Commission on Social Security Reform. This group was charged with discovering ways to help the program remain solvent.
Ultimately, despite three separate Treasury rulings which excluded Social Security Benefits as taxable income, the commission decided that taxing benefits was the quickest fix.
In late 1983, Congress passed a law making 50% of an individual’s benefit count as taxable income. It didn’t take the government long to realize what a goldmine this tax was, producing billions in revenue. So naturally, they decided to increase those taxes by adding a “second level” of up to 85% of benefits taxable.
Only about 10% of top-earning retirees were affected when Social Security benefits first became taxable. In 2023, that number has increased to around 60%, which will likely increase in the coming years. That’s because the income levels at which your benefits are taxable haven’t changed since the law first took effect. And, while the brackets remain fixed at 1983 levels, wages have increased since then.
Revenues from Social Security taxation have doubled in the last decade and are, according to the Social Security Administration, one of the primary funding sources for the program. At a 50% level, Social Security taxation brings in over $48.8 billion. Medicare gets around $34.9 billion in revenues from the 85% level. In other words, having discovered this low-hanging fruit, lawmakers are slow to make changes that might rock the tax boat.
A study by The Senior Citizens League (TSCL) indicated that 58% of retirees believe that keeping income thresholds at 1983 levels is unfair and that the brackets are due for an overhaul. Currently, you will pay tax on 85% of your benefits if you have substantial other income sources in addition to Social Security.
Based on IRS rules, you will pay these taxes if:
- You file an individual federal tax return showing income between $25,000 and $34,000. 50% of your Social Security is taxable at this level. If you make over $34,000, you may have up to 85% of your benefits taxed.
- You file a joint return with your spouse and have a combined income between $32,000 and $44,000. Your tax at this income level will be 50%.
- You and your spouse make more than $44,000. You might pay taxes on up to 85% of your benefits.
- You are married but file separately. You will likely pay taxes on your Social Security benefits.
If you are required to pay taxes on your Social Security, you can either have these taxes withheld from your benefits or make quarterly estimated payments to the IRS.
Summing things up: Many retirees mistakenly believe that only the wealthy pay taxes on Social Security benefits. Unfortunately, this is not the case. Because income levels set in the 1980s have not been revised, more retirees than ever are having bites taken out of their Social Security checks in the form of taxes.
Strategies exist to avoid some of these potential tax liabilities, and I would happily explain them to you. If you want to discover how to protect your income streams from inflation, higher taxes, and market volatility.
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