FAQ: Taxation of Social Security Benefits

By Mary Johnson, editor

Q: How Will Inflation Affect Your Taxes?

A: With inflation at historic levels, it’s helpful to know about two important inflation- related factors of our tax code that affect what older (and disabled) taxpayers may pay in taxes.  Our tax system is full of moving pieces that can be frustrating to anyone trying to figure out the bottom line.  Compounding the uncertainty, many of us rely on e-filing tax tools to do the calculations for us, without having any clear idea about what to expect.

Q: What are the two inflation - related factors that you need to watch for?

A: Up to 85% of Social Security benefits can be taxable if your “provisional” income is above $25,000 (single filers), or $32,000 (joint filers).  Unlike the rest of the tax code, the income thresholds that subject your Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984.  Consequently, any increase in Social Security income due to cost-of-living-adjustments (COLAs) could mean a portion of, or a higher portion of your Social Security benefits, would be taxable, if your income exceeds the threshold.  But the other factor — tax brackets, standard exemption, and the exemption for over 65 — are adjusted for inflation, and they are rising by a historically high amount next year, by 7% according to tax experts.  Depending on your overall income and other factors, rising tax brackets and the standard deduction could potentially offset much of the increase due to higher Social Security income.

Q: What if Social Security is your only source of income?

A:  When your only source of retirement income is Social Security, you probably won’t pay any federal income taxes on that income, according to the Social Security Administration.  But from 50% - 85% of Social Security income may become taxable if you have income from other sources, such as savings from a traditional IRA or 401(k), pension payments, or earnings from a job or other sources.

Q: Can you provide an example of how the IRS figures income?

A: The IRS has a worksheet that can help you figure out if your Social Security benefits will be taxable.  For example, let’s say you received $18,000 in Social Security and $24,000 in distributions from retirement savings in 2022.  There was no other income.  First, multiply your Social Security benefits by 50% or (0.50),            $18,000

x .50

__________    $9,000

Next, add your total taxable income from other sources, retirement account + $24,000.00

Add any tax-exempt interest                                                                              +$0.00

Your income is                                                                                                     $33,000

If the sum exceeds $32,000 for married couples filing jointly, or $25,000 for single filers, then a portion of your Social Security benefits will be taxable.

Q: How do I calculate the taxable portion of my benefits?

A: You can calculate the taxable portion using the worksheet found in the instructions for the federal 1040 returns.  (In the 2021 edition it is found on page 31.)

Q: Where can I find information about inflation adjusted tax brackets and standard deduction for 2023?

A:  The IRS tax inflation adjustments for 2023 can be found online at: https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023 

Q: What can I do if I’m worried about owing taxes on my 2022 income?

A: If you are worried that you might have a tax liability, there’s still time to send in an estimated tax payment, if you do so by January 15, 2023.  To learn about estimated payments, get IRS publication 505 (2022) Tax Withholding and Estimated Payments

Q: Why haven’t the income thresholds for the tax on Social Security benefits been adjusted?

A:  Some policy experts say that fixing the income thresholds was the intention of Congress.  But the record is not clear.  In 1984, the tax was estimated to affect roughly 10 percent of the highest - income Social Security recipients.  In fact, a review of the news archives of the time suggest that the new tax on benefits was sold to the public as affecting the wealthiest Social Security recipients. Today the tax can affect roughly 50 percent or more of all Social Security recipients.  Had the income thresholds been adjusted for inflation since 1984, the $25,000 level would be about $72,660, and the $32,000 level would be $93,000.  TSCL supports legislation that would adjust these income thresholds.