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Taxation of Social Security Benefits…Some Background on the issue - msn.com
In 1983, as part of the Social Security Amendments passed to avert a solvency crisis, Congress required all retirees to pay income taxes on 50% of their benefits if their incomes reached a minimum threshold.[1] The 1983 decision, however, did not call for adjusting the taxation thresholds, a move apparently designed to pull more and more people into tax liability.[2] By 1993, when the Omnibus Budget Reconciliation Act of 1993 (OBRA) put new and higher taxation thresholds for Social Security, the slice of beneficiaries paying federal income tax on their Social Security proceeds had grown to 18%. In 2015, the Social Security Administration estimated that nearly 60% of retiree households are subject to this income tax levy today.[3]
As a result of the thresholds being frozen in place, what was once a high income for the average retiree is now low enough that, as noted above, a substantial percentage of retiree households pay taxes on their Social Security benefits. While one popular notion calls for complete elimination of benefit taxation, a more plausible alternative might be to increase the thresholds and index them to account for future inflation. In any event, the fact that Social Security Benefits are subject to inclusion in one’s federal income tax liability often comes as a surprise to new beneficiaries–and it’s not a pleasant surprise.
An msn.com post today by Gabriela León provides a summary of the taxation process as it applies to Social Security benefits, and provides insights into how the taxation is calculated. Check it out here…
[1] Social Security Administration, Research Note #12: Taxation of Social Security Benefits, https://www.ssa.gov/history/taxationofbenefits.html
[2] ibid.
[3] Social Security Administration, Income Taxes on Social Security Benefits, https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html