If you receive Social Security, there’s a better than 50% chance that a portion of your Social Security benefits could be taxable. In 2020, the Congressional Research Service reported that the average amount of federal income taxes owed on Social Security benefits was about 6.6% of Social Security benefits. While the tax varies by income, households affected were expected to pay, on average, an estimated $3,211.
Unlike other federal income taxes, the revenues received from taxation of Social Security benefits are credited to the Social Security and Medicare Trust Funds. And even more unlike other federal income taxes, Congress hasn’t adjusted the income thresholds that subject Social Security benefits to taxation in 37 years.
The lack of adjustment has led to both a growing number of Social Security recipients who pay the tax, and a growing amount of their benefit that is subject to taxation. In 1984 when the tax on benefits became law, fewer than 10% of beneficiaries paid federal income taxes on their benefits. Today the Social Security Administration projects that as many as 56% of households receiving Social Security benefits will pay taxes on a portion of their benefits in coming years.
Up to 85% of Social Security benefits can be included in taxable income of recipients whose “provisional” income exceeds the income limits. Provisional income is determined by adding the adjusted gross income, plus otherwise tax-exempt income, plus 50% of Social Security benefits. (AGI + tax exempt income + 50% of Social Security benefits = provisional income). Social Security benefits are taxable for single filers with provisional incomes of more than $25,000 and married couples filing jointly with provisional incomes of more than $32,000. Had these income thresholds been adjusted for inflation since 1984, the $25,000 level would today be about $68,400, and the $32,000 level would be $87,550.
Social Security Trustees have estimated that the Social Security Trust Fund will receive $34.5 billion in revenues from the taxation of Social Security benefits in 2021 and that will jump to more than $45 billion for 2022. That big jump is primarily due to the rising number of new retirees and does not factor in the impacts of the 5.9% cost-of-living adjustment received in 2022.
TSCL is working for passage of Social Security legislation that would adjust these income thresholds to enable more middle income retired and disabled Americans to keep more of their benefits. Responsible legislation would need to ensure that revenues lost to the Social Security and Medicare Trust Funds due to adjusting the income thresholds are replaced from other sources of revenue. To learn more about this, see our Legislative Update “Middle Income Americans Play Disproportionate Role In Financing Social Security.” [Insert link to story.]
Editor’s note: Consider the impact that your 5.9% cost-of-living adjustment (COLA) may have on your tax situation for 2022. You might prefer to pay taxes throughout the year to avoid a big bill at tax time or worse, an underpayment penalty. You can request money be withheld from your Social Security benefit by filing Form W-4V with the Social Security Administration, requesting to have 7%, 10%, 12% or 22% of your monthly benefit withheld for taxes. You can also have taxes withheld from other income, such as IRA withdrawals or a pension. Finally, you may opt to send quarterly estimated tax payments to the IRS with Form 1040-ES.
Sources: “Social Security: Taxation of Benefits,” Congressional Research Service, June 12, 2020, RL32552. “Income Taxes on Social Security Benefits,” Patrick J. Purcell, Social Security Administration, December 2015, No. 2015-02