The Fairness of Social Security Benefit Taxations Isn’t Cut and Dry

Many seniors end up heavily reliant on Social Security once their careers come to an end. And for a good number of older Americans, those monthly benefits are their primary source of monthly income.

But it’s not a given that people in this boat will get to keep their monthly Social Security benefits in full. Many retirees are shocked to learn that Social Security benefits are taxable. And what makes matters worse is the low income thresholds at which those taxes apply.

A skewed system

Social Security benefits weren’t always taxable. Lawmakers changed the rules decades ago as a way to pump more money into the program.

Whether seniors have to pay taxes on their Social Security benefits or not depends on their combined income. That’s calculated as the total of:

• Adjusted gross income
• Non-taxable interest income
• 50% of annual Social Security benefits

Here’s where things get sort of unfair, though.

For single tax-filers, a combined income of $25,000 to $34,000 results in taxes on up to 50% of Social Security benefits. Beyond $34,000, up to 85% of benefits may be taxable.

For married couples filing jointly, these thresholds don’t even double. A combined income of $32,000 to $44,000 opens the door to taxes on up to 50% of benefits, while a combined income above $44,000 means that up 85% of benefits could be taxed.

Making matters worse is that the thresholds for combined income were established decades ago and have not been adjusted for inflation since. But Social Security benefits have risen steadily through the years thanks to the program’s cost-of-living adjustments (COLAs).

If this system continues, more and more seniors will likely have to start paying taxes on their Social Security benefits. That’s because their benefits will keep rising, even if the rest of their income doesn’t, while the combined income thresholds stay the same.

Will lawmakers make changes?

Some might argue that the whole concept of taxing Social Security benefits is unfair. After all, Americans pay taxes on their income during their working years to qualify for Social Security later in life. To then tax those benefits seems like the government coming for money twice.

This may be part of the reason why President Trump has pledged to do away with taxes on Social Security benefits. But whether that proposal sees the light of day is still up in the air.

The problem with getting rid of taxes on Social Security is that the program depends on that revenue to keep up with its financial obligations. So lawmakers may want to pivot and focus on making adjustments to the combined income thresholds rather than fight to get rid of taxes on Social Security benefits altogether.

If Social Security loses out on too much revenue, it may have to cut benefits broadly. That could hurt seniors more so than paying on their Social Security income. So a more equitable approach to the situation at hand may be to do a one-time adjustment to the combined income thresholds, and then establish a formula for annual adjustments similar to COLAs.