I’ve yet to meet anyone who gets excited about filing their taxes, but for most it’s a dull afternoon and then they get a refund deposited to their bank account. That’s not the case for many seniors, though. There’s usually no tax withholding on their retirement account withdrawals, so many actually owe the IRS money at tax time.
This gets even more complicated because it’s not just income from a job and tax-deferred retirement account withdrawals they have to worry about owing. The federal government can also tax up to 85% of their Social Security benefits if their income exceeds the thresholds for their marital status.
Social Security benefits weren’t always subject to taxes. Back when the program was struggling in the late 1970s and early 1980s, the government created these taxes as a way to increase funding for the program and avoid insolvency. It added another tier of benefit taxes in the early 1990s.
Since then, the rules for Social Security benefit taxation have remained the same. The IRS looks at your marital status and your provisional income — your adjusted gross income (AGI), plus any nontaxable interest you might have if you own municipal bonds, and half your annual Social Security benefit. The table below shows the tax brackets as they currently stand:
|
Marital Status |
0% of Benefits Taxable If Provisional Income Is Under: |
Up to 50% of Benefits Taxable If Provisional Income Is Between: |
Up to 85% of Benefits Taxable If Provisional Income Exceeds: |
|---|---|---|---|
|
Single |
$25,000 |
$25,000 and $34,000 |
$34,000 |
|
Married |
$32,000 |
$32,000 and $44,000 |
$44,000 |
Source: Social Security Administration.
This doesn’t mean that the IRS will take up to 85% of your benefits, though. The bracket you fall into determines what percentage of your benefits will be subject to ordinary income tax. So, for example, if you’re in the 22% income tax bracket you’d pay 22% tax on up to 85% of your benefits. But that can still be quite a blow to seniors.
These taxes are becoming increasingly common because the values in the table above aren’t indexed for inflation. As average incomes and benefits continue to rise, more and more retirees find themselves in the taxable range. Right now, there aren’t any plans to adjust these taxation thresholds to account for the increase in average benefits either.
President Donald Trump has stated that he’d like to eliminate Social Security benefit taxes, but doing so will require an act of Congress. So far, there hasn’t been any movement on this issue. Even if there is, it won’t help those who owe these benefits now.