Ask the Advisor: September/October 2023

Ask the Advisor: September/October 2023

What Would The Income Thresholds Be If The Tax On Social Security Benefits Was Adjusted For Inflation Like Tax Brackets?

Q: I support TSCL’s efforts to enact legislation to adjust the income thresholds that cause a portion of Social Security benefits to become taxable. What would those thresholds be in today’s dollars when adjusted for inflation back to the original 1984 effective date? Secondly, how much additional taxes do Social Security and Medicare Trust Funds need if these income thresholds are adjusted for inflation? 

A: Up to 50% of Social Security benefits first became taxable in 1984, and a second tier of taxation making up to 85% of Social Security benefits taxable became effective in 1993. At that time, the tax was described as only affecting “high-income” seniors. Yet, unlike income tax brackets, those income thresholds were never adjusted for inflation. Consequently, over time a growing number of older taxpayers wind up paying taxes on Social Security benefits as incomes grow, and they pay tax on a larger portion of their Social Security benefits.

Little wonder so many view the tax on benefits as double taxation. Today, even retirees with very modest middle incomes pay a tax on a portion of their benefits, which can grow bigger with COLA increases. Here are the income thresholds according to filing status:

  • file a federal tax return as an "individual," and your combined income* is:
    • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $34,000, up to 85 percent of your benefits may be taxable.

If the “individual” income thresholds are adjusted for inflation from 1984 to today’s dollars, then the individual filing status of $25,000 would be — $74,614, and $34,000 would be $101,475 in today’s dollars.

  • file a joint return, and you and your spouse have a combined income* that is:
    • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
    • more than $44,000, up to 85 percent of your benefits may be taxable.

If the joint filing status is adjusted for inflation from 1984 to today’s dollars, $32,000 would be $95,506, and $44,000 would be $131,320.

However, changing the taxation of Social Security benefits is a complex task. That’s because the revenues form an important source of funding for the Social Security and Medicare trust funds.

Revenues from the 50% level of taxation go to the Social Security Trust fund, which is estimated to receive $840 billion in revenues from the tax on benefits from 2023 - 2032. The Social Security Trustees estimate that the Trust Funds will receive $51.50 billion in 2023, which will grow to $119.6 billion by 2032. That’s about 3.8% of the funds required to pay benefits (including yours in 2023) and about 5.4% required to pay benefits in 2032.

Revenues from the 85% level goes to the Medicare Trust Fund. Between 2023 and 2032, the Medicare Hospital Insurance Trust Fund will receive about $599 billion from the taxation of Social Security benefits. The Trustees estimate $35.6 billion in 2023, which represents about 8.9% of the funds needed to pay benefits which are estimated to rise to $87.4 billion in 2032, representing 11.9% of the funds required to pay benefits.

Over the years, TSCL has worked with as many members of Congress willing to make the taxation of benefits more equitable. We’ve reviewed proposals that would abolish the tax on benefits altogether — but often, those proposals don’t replace the revenues lost to such a tax cut, and that could wind up short-changing both Social Security and Medicare beneficiaries. To be responsible, the revenues need to be replaced with a new source of revenue.

TSCL’s surveys have found strong support for adjusting these income thresholds. Our surveys have found that to provide extra revenues, 79% of those who participate in our surveys support lifting the payroll taxable maximum wage base and applying the 12.4% tax to all earnings rather than capping the amount of wages taxed ($160,200) in 2023.

Resources: The income threshold estimates are based on the inflation calculator maintained by the U.S. Bureau of Labor Statistics: html

To help you better understand the taxation of benefits, here’s a great background brief by the Congressional Research Service:

How should Congress address Social Security financing? Please take TSCL’s 2023 Retirement Survey and let us know!