Have you ever wondered why Social Security taxes have increased 130% in the last 10 years and what that means for you? I will explain that and why almost everyone will eventually pay taxes on their Social Security benefits.
If your Social Security benefits aren’t taxable yet, just wait. It’s probably coming soon for you.
How Benefits Are Taxed
It’s hard to have a discussion about taxes on Social Security without a brief overview of how benefits are taxed. They aren’t taxed for everyone, and, at worst case, only 85% of your benefits can be included as taxable income. I’ll get into the actual brackets in just a moment, but let’s take a look at what determines whether your benefits are taxable at all.
There’s a term within the tax code called provisional income. I’m not a tax professional, but to my knowledge, the only place this term is found is when it relates to SS benefits. It’s a formula by which the IRS determines how much of your social security benefits should be included as ordinary income on your tax return. This provisional income is simply the sum of your adjusted gross income, your tax-exempt income, excluded foreign income and one half of your SS benefits. Once you add all of those up you have your provisional income and once you’ve calculated your provisional income, you can apply it to the threshold tables to determine what percentage of your Social Security will be included as taxable income.
Is It Taxable?
If your total provisional income is less than $32,000 ($25,000 if single), none of your Social Security benefits will be taxable. However, if you are married and your total exceeds $32,000 ($25,000 for singles), then 50% of the excess income is the amount of Social Security benefits that must be included in taxable income. If your provisional income exceeds $44,000 ($34,000 for singles), then 85% of the excess amount is included in income.
Amendments to the Social Security Act
At first, Social Security benefits were not taxable. That all changed with the passage of 1983 Amendments to the Social Security Act. Under this new rule, up to 50% of Social Security benefits became taxable for certain individuals.
10 years later, the Deficit Reduction Act of 1993 expanded the taxation of Social Security benefits. Under this Act, an additional bracket was added where up to 85% of Social Security benefits could be taxable above certain thresholds.
Since those brackets have been added, they’ve never been changed! As far as I know, there are no plans to change them in the future. This means that as the general income levels rise, more individuals will be subject to taxation on their social security benefits.
For proof of this, look at what’s already happened. Since taxes on SS benefits were introduced, the revenue coming in from these taxes have skyrocketed. Here’s an example: In 2008, taxes were slightly above 15 billion dollars. In 2017, this amount was 130% higher!
What You Need To Know
Here’s the big takeaway: When you’re planning for retirement, you probably ought to go ahead and include your SS benefits as taxable income. I don’t expect these brackets to ever increase because the tax revenue collected is returned back to the SS trust fund and used to pay benefits. There’s just too much trouble down the road for the solvency of SS for anyone to suggest cutting revenue. So, reduce the amount of income you expect to receive from SS to reflect the bite that the IRS will take.
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Question: Do you think Social Security benefits should be taxable? Put your answer in the comments below and I look forward to seeing what you think about this.
Thanks for reading, and have a great day!