Social Security Tax Could Be Eliminated by Reforms — How To Find Out If You Pay Taxes

Close up of a senior couple having breakfast and doing bills.
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Close to 60% of Americans aren’t aware that the Social Security benefits they receive during retirement are not taxed the same way as withdrawals from individual retirement accounts, according to a recent quiz by MassMutual reported by CNBC.

However, just because Social Security benefits are taxed differently than IRAs doesn’t mean you can collect Social Security benefits tax-free. These benefits are taxed using a formula developed by Congress in the 1980s and adjusted in the ’90s. And, as the government explores Social Security reform, that formula could change again.

Nancy Altman, president of the social welfare organization Social Security Works, told CNBC that taxes on Social Security benefits are “not well understood.” She added, “People hate it, but it actually makes policy sense.”

When the government first introduced Social Security retirement benefits in 1935, that income was not taxable, CNBC noted. In 1983, Congress passed legislation allowing up to 50% of Social Security benefits to be included in taxable income for certain taxpayers who exceeded specific income levels.

Today, up to 85% of Social Security benefits may be taxed. The IRS explains how to determine the taxable portion of your benefits using something called your “base amount,” which varies according to filing status.

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In 2022, the base amount is:

  • $25,000 for single, head-of-household, qualifying widow(er) or married filing separately and lived apart from your spouse for the full tax year
  • $32,000 for married couples filing jointly
  • $0 if you’re married filing separately and lived with your spouse at any time during the tax year
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If the total of one-half of your benefits plus all other income is greater than your base amount, you’ll owe taxes on your Social Security benefits. Spouses filing jointly must add their incomes and benefits when calculating the base amount. If only one spouse collects Social Security benefits, both incomes are still added to calculate the base amount.

Individuals with combined income greater than the base amount but less than $34,000 will pay taxes on up to 50% of their Social Security benefits. Individuals with combined income greater than $34,000 and couples with combined income greater than $44,000 could pay taxes on as much as 85% of their Social Security benefits.

These rules were originally intended to tax only high earners. But the thresholds have not been adjusted for inflation over the years the way they have under many other tax laws.

When Congress considers Social Security reform to shore up the trust funds designed for Social Security retirement benefits, it might look at increasing base amounts to avoid penalizing the middle class and ensure these retired workers — especially those who lack substantial retirement savings — receive the benefits they deserve .

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