In a shock to many retirees: Social Security benefits could be taxed

Until 1984, Social Security benefits were not taxed at all. In 1993, Bill Clinton signed legislation that expanded tax thresholds, making up to 85 percent of benefits taxable for recipients with a combined income of more than $34,000 ($44,000 for joint filers). Those who earn less could be taxed up to 50 percent of their benefits. Combined income consists of a filer’s adjusted gross income, untaxed interest (such as from municipal bonds), and half of a person’s annual Social Security payments.

Over the past 39 years, both Social Security benefits and federal income tax brackets have continually shifted upward to compensate for inflation — but the income thresholds that trigger a retiree’s benefits to be taxed have not. When the tax went into effect in 1984, during the Reagan administration, it was estimated that it affected about 10 percent of Social Security recipients. In 2022, 48 percent of recipients paid taxes on some of their benefits, paying $48.6 billion that year, according to the Social Security Administration. Most states do not apply income taxes to Social Security benefits.

“Because the limit is not benchmarked against inflation, more and more beneficiaries are subject to the tax,” said Anqi Chen, deputy director of savings research for the Center for Retirement Research at Boston College. One consolation is that even at higher income levels, some portions of benefits are not taxed at all, while the rest are taxed at the filer’s regular tax rate, Ms. Chen said. That gives an average effective tax rate of about 6.6 percent, she said, “which is not nothing, but it is also a small percentage.”

The result is that one filer who collects the average monthly benefit of $1,844.76 can be taxed on up to half of her Social Security benefits as her annual total earned income – from wages, a pension, withdrawals from taxable retirement accounts, interest payments, gambling winnings, or any other taxable source – amounted to just under $14,000. Add another $9,000 in income, and the filer would have to pay taxes on up to 85 percent of her benefits. For joint filers, the tipping point is around $9,900 to reach the 50 percent tax threshold, and just under $22,000 for the 85 percent threshold.

For a clearer idea of ​​the tax liability they may face, retirees can refer to the calculator called “Are my Social Security or Railroad Retirement Tier I benefits taxable?” on the tax authorities’ website.