The number of older Americans who pay federal income tax on their Social Security benefits is rapidly growing, according to recent surveys by TSCL. Twenty-three percent of participants in TSCL’s latest Retirement Survey said they paid federal income tax on a portion of their Social Security benefits for the first time in 2023, when the cost-of-living adjustment (COLA) increased Social Security income by 5.8% the year before. Now TSCL expects this trend will continue during this year’s tax season after the 8.7% COLA raised Social Security income in 2023.
Unlike federal income tax brackets, the income thresholds that subject Social Security benefits to taxation have never been adjusted for inflation since the tax became effective in 1984. This means that more older taxpayers not only become liable for the tax on Social Security benefits over time, but also the portion of benefits that are taxable can increase as retirement income grows.
To determine what portion of Social Security benefits will be added to taxable income, the IRS requires that taxpayers add:
Adjusted Gross Income (AGI)
+ nontaxable interest
+ half of Social Security benefits
= “combined income”
If you 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 you file a joint return, and you and your spouse have a “combined income” that’s:
- 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 these thresholds had been adjusted more like federal income tax brackets, the individual $25,000 level would be over $75,000 and the joint filer level would be more than $96,000 based on inflation through November 2023.
The swelling tax revenues from the taxation of the Social Security benefits are earmarked for the Social Security and Medicare Trust Funds. Taxation of Social Security in fact, forms an important and growing share of the funds needed to pay the Social Security and Medicare benefits of current retirees.
The Social Security Trustees estimate that in 2024 the Trust Fund will receive $57.3 billion in benefit tax revenues accounting for about 4% of the financing required to pay benefits. Medicare Trustees estimate that the Medicare Trust Fund will collect about $40 billion in revenues from the tax on Social Security benefits forming about 10% of the financing needed for payment of Medicare benefits.
TSCL is working to get legislation introduced that would not only adjust these income thresholds but also ensure new replacement revenues come from other sources to strengthen Social Security and Medicare financing.
Will you pay tax on your Social Security benefits this year? Please take TSCL’s 2024 Senior Survey online at SeniorsLeague.org/2024-senior-survey.
Need help figuring out if your benefits might be taxable? The IRS has a calculator that can help you determine if your Social Security benefits will be taxable: https://www.irs.gov/help/ita/are-my-social-security-or-railroad-retirement-tier-i-benefits-taxable.
See also: Publication 915, Social Security and Equivalent Railroad Retirement Benefits
https://www.irs.gov/forms-pubs/about-publication-915.
