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Why Half of Retirees Now Pay Taxes on Their Social Security

Why Half of Retirees Now Pay Taxes on Their Social Security

Having Social Security taxes taken from your paycheck is bad enough. But for millions of Americans, the obligations don’t end there.

Half of retirees say they paid income taxes on their Social Security benefit income during the 2019 tax year, according to a survey by the Senior Citizens League.

Mary Johnson, a Social Security and Medicare policy analyst for the Senior Citizens League, notes:

“There was no change from previous years in the 50 percent of retiree households who report that they pay tax on a portion of their benefits, despite the 2017 tax reform law.”

As the league points out, the problem is likely to grow worse with time.

While income tax brackets are adjusted for inflation over the years, there has been no adjustment since 1984 to the income thresholds that subject Social Security benefits to taxes. That was the first year benefits became taxable.

How bad has the problem become since then? Initially, less than 10% of Social Security recipients were expected to owe taxes on their benefits. Now, Uncle Sam is reaching into the pockets of about half of recipients.

Even retirees with modest incomes can become ensnared in these taxes. As the league states:

“Up to 85 percent of Social Security benefits can be subject to taxation if an individual has a combined income of $25,000 and married couples filing jointly have a combined income of $32,000. Had income thresholds been adjusted for inflation, they would be about $62,902 for individuals and $80,515 for joint filers in 2020.”

Your combined income determines whether your Social Security benefits are taxable by the federal government and, if so, to what extent. For a complete definition of combined income, read “9 Social Security Terms Everyone Should Know.”

How to avoid Social Security taxes

You can’t avoid death and taxes, as the old cliche goes. But perhaps we can help you a bit with the latter.

For example, as we have reported, holding municipal bonds — which usually are viewed as tax-friendly — can backfire if you are trying to avoid paying taxes on Social Security income:

“A lot of people turn to municipal bonds as a way to lower their tax bill. Interest earned from these types of bonds typically is not subject to income taxes. However, municipal bond interest is included in the formula that determines whether you will pay taxes on your Social Security benefits.”

Another way to trim your tax bill is to live in a state that does not tax benefits. Learn more about these havens in “ 26 States That Don’t Tax Social Security Benefits.”