Edward Cates, Chairman of the Board, TSCL
58% of Older Taxpayers Say Income Thresholds for Taxation of Social Security Benefits Should Be Adjusted
You said it! We recently learned that 58% of older taxpayers think the income thresholds that subject Social Security benefits to taxation are long overdue for an adjustment to today’s dollars, according to our most recent Senior Survey.
Unlike income tax brackets and standard deductions which are adjusted annually, the Social Security income thresholds have never been adjusted for inflation since benefits first became taxable almost 4 decades ago, in 1984. This failure to adjust the income thresholds is negatively viewed by older taxpayers as a form of double taxation and even described by some as “ageist.”
The number of older taxpayers who pay taxes on a portion of their benefits is far higher today than the 10% that was originally estimated to be affected by the tax in 1984 when the tax became effective. Social Security recipients can owe taxes on up to 85% of their Social Security benefits when their “combined income” is greater than $25,000 (single filers) or $32,000 (couples filing jointly.)
As many as half of older households can be subject to the tax on Social Security benefits according to a background brief by the Congressional Research Service. The number is growing as cost-of-living adjustments (COLAs) increase Social Security benefits and income from pensions, savings, and other sources has increased as keeping up with inflation meant bigger withdrawals for many retirees. Had these income thresholds been adjusted like tax brackets, the $25,000 level today would be roughly $73,000 and the $32,000 level would be $93,200.
The share of Social Security benefits that will be paid in taxes was estimated to be 6.6% by the Congressional Research Service in 2020. That share of benefits paid in federal taxes could climb this tax season and next year due in large part to the unusually high COLA increases in 2022 and 2023.
Changing these thresholds would not be simple in a divided Congress and would require 60 votes in the Senate to pass. That’s because the taxation of benefits is an important source of revenue for Social Security and Medicare. The revenues from the taxation of Social Security benefits at the 50 percent level are estimated by the Social Security Trustees to provide about $48.8 billion in income for Social Security in 2023 and cover about 4 percent in program costs. Revenues from the 85 percent level of taxation go to Medicare. Trustees estimate Medicare will receive about $34.9 billion in revenues from the taxation of Social Security benefits covering an estimated 8.5 percent of program costs in 2023.
TSCL has supported legislation that would adjust these income thresholds in the past and is working to get Members of Congress on board with the idea that the time has come to make our tax system fairer and more equitable. Adjusting the income thresholds can be paid for by eliminating the cap on wages that are subject to payroll taxes or by creating a new stream of revenue by applying the 6.2% Social Security payroll tax to dividends, interest, and certain other types of investment income.