Social Security Benefits Tax: Sticking It to Grandpa

Q: Tax Playa, I am retired.  Do I have to pay taxes on Social Security benefits?
Rob, Dunn Loring VA

A: Social Security benefits are subject to income tax.  They are either 0% taxable, 50% taxable, or 85% taxable (depending on your household income).  Most younger workers should count on their benefits being 85% taxable.

For more information on this topic, see IRS Publication 915, "Social Security and Equivalent Railroad Retirement Benefits."

First, how should Social Security benefits be taxed?  They should certainly not be entirely tax-free.  When employers contribute their half of FICA, they deduct it out of their business income as an expense.  That money should be added back to the tax base so that income is taxed once and only once.

Social Security benefits also probably shouldn't be all taxed, because worker contributions are after-tax, and that money never left the tax base.

Thus, it would seem that an equitable solution would be for all Social Security benefits to be 50% taxable.  Of course, this is taxes--nothing is equitable.

There are three scenarios for retired people and Social Security benefits taxation:

1. No Benefits Taxed

No taxes must be paid on benefits if half your Social Security benefits, all of your tax-exempt income (municipal bonds, Roth IRA distributions, etc.), and the rest of your income does not exceed:

• $25,000 for singles, heads of households, married filing separately living apart from your spouse, and qualifying widow(er)s
• $32,000 for married filing jointly
• $0 for married filing separately but living with your spouse

2. Half of Benefits Taxable

If the above calculation exceeds those limits, then half of your Social Security benefits must be added into income.

3. 85% of Benefits Taxable

85% of your benefits is taxable if half your Social Security benefits, all of your tax-exempt income, and the rest of your income exceeds:

• $34,000 for singles, heads of households, qualifying widow(er)s, and married filing separately living apart from your spouse
• $44,000 for married filing jointly
• $0 for married filing separately but living with your spouse

These numbers are not indexed for inflation.  Therefore, over time most or all taxpayers can expect for 85% of their Social Security benefits to be taxable.

The good news is that Social Security is going bankrupt, and most younger workers shouldn't expect much of a check, anyway.

A 30 year old earning $50,000 can expect to receive a Social Security benefit of $6511 at age 67, according to the Social Security Administration.  Even if he has no other income and the system is so broke that it can only pay 87% of promised benefits, he'll still have to pay taxes on 85% of his benefits.  At the very least, he'll have to pay taxes on half of it.

Use the calculators on the front page of taxplaya.com to see what your Social Security benefit is likely to be.  Then, see how much of it you will have to fork over in taxes.  Chances are, you'll have to pay tax on 85% of whatever benefits you luck into.

Comments

[john townley]

I have been paying this tax since retirement in 1993. I'd like to know how and why this tax was created. I have written our congressman to repeal this for years - nothing happens. As indicated above, not indexed for inflation. Also, AARP is not interested in doing anything about it. I don't why middle income retirees are not furious and sceaming about this double tax. How can we get some action PLEASE HELP US!!!