83% Think Income Thresholds That Subject Social Security Benefits To Taxation Should Be Adjusted For Inflation.
By Daisy Brown, TSCL Legislative Liaison
When incomes grow like they did this year with an 8.7% COLA, more older taxpayers pay tax on a bigger portion of their Social Security benefits. Little wonder that 83% of those participating in our new poll think the income thresholds that subject Social Security benefits to taxation need adjustment for inflation.
Up to 85% of Security benefits can become taxable when your income exceeds certain thresholds. Social Security benefits first became taxable in 1984, and at the time, the public was told the tax would affect “high-income” seniors — less than 10% of older taxpayers.
Today roughly 50% of all older households pay federal income taxes on a portion of their Social Security benefits and that number is growing. Unlike income tax brackets which are adjusted annually for inflation, income thresholds that subject Social Security benefits to taxation haven’t been adjusted for inflation in 40 years. Consequently, over time a growing number of even modest income seniors pay tax on a portion of their Social Security benefits.
Here are those income thresholds which are fixed under current law, and what those thresholds might be if adjusted to today’s dollars:
- 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.
Due to the high level of support to adjust income thresholds, TSCL is working with Members of Congress on legislative solutions. But changing the taxation of Social Security benefits is a complex task. The revenues raised from this tax 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 today’s 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 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.
To help you better understand the taxation of benefits, here’s a great background brief by the Congressional Research Service: https://crsreports.congress.gov/product/pdf/IF/IF11397.