How A Tax on “Wealthy” Retirees Ended Up A Tax On The Middle Class

How A Tax on “Wealthy” Retirees Ended Up A Tax On The Middle Class

Mary Johnson, editor

Roughly one-half of all retiree households report that a portion of their Social Security benefits is subject to taxation, according to TSCL’s Senior Surveys.  That’s substantially more than expected from the time when the tax on benefits was first enacted in 1983.  At that time, the tax was estimated to affect just 10 percent of Social Security beneficiaries.  The Congressional Quarterly referred to this revenue change as ‘taxing the benefits of high-income recipients.’  And even Social Security’s archives state that Congress intended that the taxation of benefits should not affect ‘lower income individuals.’

The revenues from the tax on Social Security benefits are credited to the Social Security and Medicare trust funds and, in coming years, will provide a growing share of the programs’ financing.  The Social Security Trustees estimate that the tax on benefits will provide about $545 billion from 2019 through 2028, and will provide $398 billion in financing for Medicare over the same period.

But unlike other parts of the tax code which are adjusted for inflation, such as income brackets, the income thresholds that subject a portion of Social Security benefits to taxation have never been adjusted.  Today, the Social Security benefits of even modest-income retirees — those who have modified gross incomes of more than $25,000 (single filers) or $32,000 (joint filers) are affected by the tax.  Had the income thresholds been adjusted for inflation, the $25,000 threshold for single filers would be about $63,137 today, and the $32,000 threshold for joint filers would be about $80,815, using the Bureau of Labor Statistics’ inflation calculator.  As one of my colleagues points out, even these inflation - adjusted levels today, “are not exactly wealthy.”

New retirees can be caught off guard by the tax, and the Social Security Administration’s information about it can be easily misconstrued.  Information about the tax on Social Security website says that the tax affects retirees with “substantial income.”  It states: “Some of you have to pay federal income taxes on your Social Security benefits.  This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).  Few people today think of income as low as $25,000 -$32,000 as ‘substantial’ income.

To determine the taxpayer’s modified adjusted gross income, half of Social Security benefits are added to the adjusted gross income, plus any tax-exempt interest, and certain other tax-exempt income.  To calculate the taxable portion of benefits, you can find a worksheet in IRS publication 915.

Legislation is currently under consideration in the House, The Social Security 2100 Act (H.R. 860), that would adjust the income thresholds that subject Social Security benefits to taxation, from $25,000 to $50,000 for single filers and from $32,000 to $100,000 for joint filers.  According to a survey by The Senior Citizens League, 55 percent of survey participants support lifting the threshold for taxation of Social Security benefits to those levels, and only 12 percent oppose.  The bill would pay for this, as well as providing a boost in Social Security benefits and a more generous cost-of-living adjustment, by increasing the amount of wages subject to payroll taxes and by very gradually increasing the tax rate that workers and employers pay.

Will you pay taxes on a portion of your Social Security benefits?  Take TSCL’s annual Senior Survey: