Social Security QuickStart Guide by ClydeBank Finance

Author:ClydeBank Finance
Language: eng
Format: epub
Publisher: ClydeBank Media LLC
Published: 2017-06-13T00:40:05+00:00

Chapter Recap

| 4 | How Taxes Affect Social Security

During its early decades, Social Security income was completely tax exempt under the rationale that the benefits income was derived from wages that were subject to taxation once already. It would thus be unfair to tax those wages again in the form of Social Security benefits. According to this line of thought, Social Security income was considered ‘after tax’ income.

The federal government’s attitude towards taxing Social Security benefits has changed over time. One piece of evidence supporting the rationale for Social Security taxation comes from an analysis of Social Security’s private sector counterpart, private pensions. The actual worker earnings that go into a pension fund are already taxed up-front, so when those earnings are recovered years later in the form of pension payouts, they are not taxed. But what a retiree pulls out of a pension is both the worker’s earnings and the added value brought about by the pension’s maturity, and with most pensions, this latter component of the pension payout is indeed taxable as it was accrued tax free.

The SSA claims that only 15% of the Social Security benefits being paid out come from the already once-taxed payroll taxes, with the other 85% of the benefits coming from other largely untaxed sources. This is the philosophical justification for the reason why Social Security benefits should be subject to some taxation. Long story short, since the time your paycheck first contributed a fraction of its dollars and cents to FICA, those dollars and cents have expanded in value, and that expansion has been largely untaxed.

The Social Security Advisory Council was formed in the 1970’s to evaluate the future financing of the program. The suggestion of taxing some of the benefits payable by Social Security rose from this council. In the early 80’s the Greenspan Commission made a specific recommendation that an income threshold be established, and that 50% of Social Security benefits would be taxed only after that threshold was breached. In 1983, the Greenspan Commission’s recommendations found their way into law in the form of the 1983 Social Security Amendments. The thresholds were set at $25,000 for single filers and $32,000 for joint filers. A second tier of taxation was then added a decade later, mandating that individuals with income in excess of $34,000 a year and couples with income in excess of $44,000 have up to 85 percent of their Social Security income taxed.

Today, some individuals’ or couples’ Social Security earnings are taxable, but usually this only occurs if there is a lot of extra income coming into the household from other sources, such as wages, self-employment, or interest and dividends from investments.

As a rule, no one pays taxes on more than 85% of his or her Social Security earnings. Individuals with a combined income of between $25,000 and $34,000 still pay taxes on up to 50% of their Social Security benefits, and individuals earning more than $34,000 may see up to 85 percent of their Social Security earnings taxed.

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