Social Security Benefits and Taxes (Part 1)

Social Security benefits are the primary source – and in some cases the sole source – of income for a majority of Americans.  Many Americans have little to no retirement savings.  Company pension plans have become rare and even when available, most people do not stay with a single company long enough to qualify for much.  Then there are people – most often women – who were not in the work force for many years for reasons such as raising a family.

On top of that, most Social Security benefits are taxable, which further reduces the amount received.  This wasn’t always the case until the mid 1980’s.  Trying to address a funding problem (which has not been solved but instead has only worsened over time), in 1984 Congress subjected a portion of benefits to federal income tax. (Some but not all states exempt Social Security from state income tax). Taxpayers at higher income levels pay more tax.

Today, beginning at income of $25,000 for a single person and $32,000 for a married couple, 50% of Social Security benefits are taxed.  Once income exceeds $34,000 for a single person and $44,000 for a married couple 85% of benefits are subject to tax.  To make matters worse, these thresholds do not adjust for inflation so each year more Social Security benefits are subjected to income tax than the year before.

Congress has made numerous attempts in the last several years to pass legislation to exempt Social Security from income tax.  Each attempt has failed.  As with any presidential election, politicians float ideas of proposed tax cuts.  This year is no different.  Next week I’ll discuss the proposals relating to Social Security.