Q: How Important Is Benefit Taxation to Social Security and Medicare Financing?
A: The proceeds from the taxation of Social Security benefits are credited to the Social Security and Medicare Trust Funds and currently form a growing portion of the income received by the programs. In 2023, the Social Security Trust Fund is estimated to receive $48.8 billion in revenues from the taxation of Social Security benefits, accounting for 4.5% of total program income. Medicare is estimated to receive $34.9 billion accounting for 8.5% of the funding for the Hospital Insurance Trust Fund.
In 2020, the average federal income tax liability on Social Security benefits was an estimated $3,200 per taxpayer household. Approximately half of Social Security beneficiaries pay federal income taxes on a portion of their Social Security benefits — roughly double the number of Social Security beneficiaries affected by the tax since 1998. A report from the Congressional Research Service says that the number of households affected by taxation of benefits will continue to rise over time, because the income thresholds to determine tax liability are fixed and have never been adjusted for inflation. In addition, the report says that when “non-Social Security income” remains constant as Social Security benefits increase due to cost-of-living adjustments, the taxable amount of Social Security benefits increases.
Calculation of taxable Social Security benefits depends on the benefits received and other income.
- Taxpayers with “provisional” income of less than $25,000 (single filers) or less than $32,000 (joint) do not pay federal income taxes on their Social Security benefits.
- Up to 50% of Social Security benefits are taxable when “provisional” income is between $25,000 and $34,000 (single filers), or $32,000 and $44,000 (joint filers). The proceeds from this tier are credited to the Social Security Trust Fund.
- Up to 85% of Social Security benefits are taxable when “provisional” income is greater than $34,000 (single filers), or $44,000 (joint filers). Proceeds from this tier are credited to the Medicare Hospital Insurance Trust Fund.
Should Congress change the taxation of Social Security to allow beneficiaries to keep more of their income?
Let us know whether you support or oppose ideas to adjust income thresholds and how to ensure continued funding for Social Security. Take TSCL’s new 2023 Senior Survey at www.SeniorsLeague.org/2023seniorsurvey
Social Security Benefit Taxation Highlights, Congressional Research Service, June 12, 2020.