A Shock for Many Retirees: Social Security Benefits May Be Taxed – The New York Times

Social Security benefits were not taxed at all until 1984. Then in 1993, Bill Clinton signed a law that expanded tax thresholds and made up to 85 percent of benefits taxable for recipients with total income of more than $34,000 ($44,000 for co-filers). Anyone who earns less could have to pay tax on up to 50 percent of their benefits. Combined income consists of an applicant’s adjusted gross income, untaxed interest (e.g. from municipal bonds), and half of annual Social Security payments.

Over the past 39 years, both Social Security benefits and federal income tax rates have been continually shifted upward to compensate for inflation – but the income limits that tax a retiree’s benefits have remained unchanged. When the tax went into effect in 1984 during the Reagan administration, it was estimated to affect about 10 percent of Social Security recipients. According to the Social Security Administration, 48 percent of recipients paid taxes on some of their benefits in 2022, paying $48.6 billion that year. Most states do not impose a state income tax on Social Security benefits.

“Because the limit is not measured by inflation, more and more beneficiaries are subject to the tax,” said Anqi Chen, associate director of savings research at 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 applicant’s normal tax rate, Ms. Chen said. This results in an average effective tax rate of around 6.6 percent, “which is not nothing, but also a small percentage.”

The result is that a single claimant receiving the average monthly benefit of $1,844.76 could be taxed on up to half of their Social Security benefits if their total annual income – from wages, a pension, withdrawals from taxable retirement accounts, interest payments , gambling winnings, etc. or another taxable source – was just under $14,000. Adding another $9,000 in income would require that claimant to pay taxes on up to 85 percent of their benefits. For co-applicants, the tipping point is about $9,900 to meet the 50 percent tax threshold and a little less than $22,000 for the 85 percent tax threshold.

For a clearer picture of the tax liability they will face, retirees can use the “Are my Tier I Social Security or Railroad Retirement Benefits Taxable?” calculator. on the IRS website.