Ask Rusty: About Federal Taxation of Social Security Benefits

Dear Rusty: Why are my Social Security benefits being taxed at all? The Social Security FICA payroll taxes taken out of my paycheck while I was working were paid with taxable income.

Signed: Disgruntled Taxpayer

Dear Disgruntled Taxpayer: Many Americans share your belief that federal taxation of Social Security benefits is unfair because we pay into the program through payroll taxes on our taxable earnings. Unfortunately, Congress took a different view in 1983 when taxation of Social Security benefits was first enacted at a time Social Security was having financial issues. Congressional logic back then was that a beneficiary only personally pays 50 percent of the Social Security contributions made (the other half is paid by the employer) so, since your Social Security entitlement was only half paid for by you and the other half by your employer, the portion of your benefit attributable to your employer’s contributions should be taxable. So, it’s that other half — the portion of your benefit which resulted from employer contributions — which the 1983 Congress decided should be taxed. So, starting in 1984, if a beneficiary’s overall annual income from all sources exceeded $25,000 for a single filer or $32,000 for those filing married-jointly, half of that person’s Social Security benefits became part of their income taxable by the IRS. 

 That was how it worked until 1993 when a new and different Congress added another threshold which, if exceeded, resulted in up to 85 percent of Social Security benefits received during the tax year becoming taxable. The logic used for the 1993 law was that beneficiaries, on average, would only personally pay for about 15 percent of the lifetime benefits they would eventually receive. That led that Congress to conclude that if your combined income from all sources exceeded the higher threshold ($34,000 for single filers and $44,000 for those filing married/jointly), up to 85 percent of your benefits should be taxable. Please understand that I’m not defending nor endorsing those historical Congressional views, but I have researched why Social Security benefits are taxable at all, and the above is what I have learned from that research.

Please note, the Association of Mature American Citizens (AMAC) has long advocated for eliminating federal taxation of Social Security benefits or, at the very least, raising the thresholds at which benefits become taxable. The income thresholds for taxing Social Security benefits were established in 1983 and 1993, but those thresholds have never been adjusted for inflation. When taxation of Social Security started in 1984, less than 10 percent of beneficiaries paid income tax on their benefits, whereas today that percentage is over 50 percent and growing. If you want to add your voice to those who oppose federal taxation of Social Security benefits, you may wish to contact your Congressional representative to do so. And it is worth noting that 11 U.S. states, to varying degrees, also levy income tax on Social Security benefits.      

Russell Gloor is a national Social Security advisor at the AMAC Foundation, the nonprofit arm of the Association of Mature American Citizens (AMAC). The 2.4-million-member AMAC says it is a senior advocacy organization. Send your questions to: ssadvisor@amacfoundation.org.

Author’s note: This article is intended for information purposes only and does not represent legal or financial guidance. It presents the opinions and interpretations of the AMAC Foundation’s staff, trained and accredited by the National Social Security Association (NSSA). The NSSA and the AMAC Foundation and its staff are not affiliated with or endorsed by the Social Security Administration or any other governmental entity.