Surprise! Your Social Security Benefits May be Taxed
For many folks entering the retirement world with an understanding of what their monthly Social Security benefit payment–the benefit they’ve earned through a lifetime of work and FICA tax contribution–will be, it comes as a surprise at tax time to learn that a large portion of this benefit is subject to federal income tax. As the Motley Fool’s Dan Caplinger points out in an article posted on www.fool.com, about 20 million people find themselves in this category, with somewhere between 50% and 85% of their monthly benefit subject to federal income tax. Caplinger’s article, which you can access here, provides some of the history on the benefit taxation issue and explains the calculation process as it exists today. It also provides an analysis of where Social Security benefits are taxed at the state level as well. He also provides some strategies for minimizing the impact of taxes on Social Security benefits.
As Caplinger’s article notes, the thresholds for taxation of Social Security benefits are not indexed for inflation. Since they aren’t indexed, and have not been adjusted in the past 25 years, the population of taxpayers affected has grown dramatically as wage levels increased. In fact, when the first round of taxation was assessed on Social Security benefits in 1983, the impact was felt by roughly 10% of the taxpaying population. Today, it’s felt by more than half (and growing yearly). The argument is, of course, that this is a form of “double taxation,” since it is actually a tax on benefits generated from income that has already been taxed. But with benefit taxation adding substantially to the income stream of a program facing long-term solvency issues (in 2017, it brought in roughly $38 billion), it’s not likely that the thresholds will change unless the issue is part of a larger Social Security reform effort.