Should Social Security be taxed? - article
Should Social Security be taxed?
About a third of Social Security recipients pay federal income tax on a portion of their benefits. Is that fair?
This post comes from Jim Wang at partner blog Bargaineering.
After a post a few weeks ago about reading your Social Security statement, reader "J. Shoe" asked the following question:
Just trying to find out if it is true that any Social Security benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and is there a link to see this horrific scam? It's bad enough they borrow from SS without the intention of paying it back, but this crazy.
I don't see how it's crazy, but I also didn't fully understand how Social Security benefits are taxed. For more information, I turned to Publication 915: Social Security and Equivalent Railroad Retirement Benefits (.pdf file), which is the IRS document that explains everything.
Are your benefits taxable?
Add up all the benefits you received, which is in Box 5 of your Form SSA-1099. Take half of that amount and add it to your taxable pensions, wages, interest, dividends and other taxable income. Then add any tax-exempt interest income, such as from municipal bonds or savings bonds. (Post continues below.)
Now compare that number with the base amount for your filing status (these are 2011 figures):
- Single, head of household, or qualifying widow(er) -- $25,000.
- Married filing jointly -- $32,000.
- Married filing separately (living apart) -- $25,000.
- Married filing separately (living together at any time during the year) -- $0.
If your total is less than the base amount for your filing status, you are not taxed on any portion of your benefits. If your number is more than the base figure, you'll be taxed on up to 50% of your benefits. If your base number is greater by a significant amount -- $9,000 more for single, head of household and qualifying widow(er) or $12,000 more for married filing jointly -- then you'll be taxed on up to 85% of your benefits.
The Social Security Administration says that about a third of recipients pay federal income tax on a portion of their benefits.
Should Social Security benefits be taxed?
I don't think so. When you make (forced) contributions, those amounts are deducted from your income but you still pay income taxes on them. When you get disbursements from the SSA, you can be taxed on up to 85% of your benefits, which means you're getting a 15% discount, but it's on contributions that were already taxed when you made them.
It's a little messy because you get more out of Social Security than you put in, but you were taxed going in, so should you be taxed going out? It's like making a contribution to a Roth IRA and then being taxed on the back end too.