Every tax season, the same question arises from Americans receiving Social Security. “Do I have to pay taxes on my Social Security benefit?” The next question is a logical progression. “How much?” It’s based on an IRS formula for combined income.
Combined income = Adjusted Gross Income (AGI) + nontaxable interest + ½ of Social Security benefits.
Once you know the answer to the equation, that number gets plugged in to IRS income brackets:
- If you’re single and your combined income is between $25,000-$34,000 you’ll have to pay income tax on up to 50% of your benefit.
- If you’re single and your combined income is more than $34,000, you’ll pay income tax on 85% of your benefit.
- If you’re married filing a joint return and combined income is between $32,000-$44,000 you’ll pay income tax on up to 50% of your benefits.
- If you’re married filing jointly and combined income is above $44,000, you’ll pay income tax on 85% of your benefit.
Unfortunately, more people find themselves being taxed on Social Security every year because the income brackets for Social Security are not indexed for inflation. They have remained the same since a 50% tax was placed on Social Security in 1984. In 1993 a second category was added to tax high income earners on 85% of their benefits.
In the beginning, less than 10% of Social Security recipients paid taxes on what they received. Today it’s almost 60% because Social Security checks increase each year based on the annual cost-of-living-adjustment (COLA), while the income brackets remain unchanged. COLAs are supposed to keep Social Security benefits even with inflation, but when they increase to the point a recipient has to pay taxes on it, those recipients are worse off than before they got the COLA.
According to the Senior Citizens League, if income thresholds had been adjusted for inflation, single retirees would pay taxes on Social Security if their income was above $62,902 and joint filers would be taxed if their combined income was above $80,515.
For years, the problem of not adjusting Social Security income brackets for inflation has been presented to Washington ad nauseum. The government has, so far, has been deaf.
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