Social Security benefits are not subject to federal income taxes for some retirees, but they are for others. Those who have higher incomes will be taxed on part of their benefits.
Unfortunately, because of the way that the rules for Social Security taxation were set up, a growing number of retirees are taxed on their benefits every year. Here's why more seniors will have to give up a part of their benefits to Uncle Sam in 2024.
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Social Security benefits become taxable when combined income exceeds a specific threshold
First, it's important to understand the IRS rules for when you may have to pay taxes on benefits. The key here is your combined income, which you can calculate by adding up:
- 1/2 of the amount of your Social Security benefits
- All taxable income
- Some non-taxable income, including interest from municipal bonds
Once you've figured out what your combined income is, you'll need to see if you are above the threshold at which benefits become taxable for someone with your filing status. The table below shows how much combined income you must have to owe the IRS taxes on Social Security benefits.
|
% of Benefits Taxed |
Income for Single Filers |
Income for Joint Filers |
|---|---|---|
|
Up to 50% |
$25,000 to $34,000 |
$32,000 to $44,000 |
|
Up to 85% |
More than $34,000 |
More than $44,000 |
Table source: Social Security Administration
If you make less than this amount, you will not have to worry about the federal government taxing your retirement checks. If you make more, though, then part of your benefit is taxed, so the actual amount of Social Security you're left with to cover your costs is reduced.
Why do more people get taxed on their benefits each year?
Unfortunately, more people find themselves being taxed on their benefits every year. And there's a simple reason for that.
Those income limits at which benefits become taxable are not indexed to inflation. They do not go up over time, and have remained the same since benefits first became taxable. That happened first in 1983 when the 50% tax was introduced, and then again in 1993 when the second category was introduced and up to 85% of benefits became taxable for higher earners.
It may seem hard to believe that the income at which benefits become taxable has not changed for decades, since obviously prices and wages have gone up since then due to inflation and wage growth. Each year, people typically make a little bit more money, but their spending power doesn't necessarily increase because prices rise as well. Yet none of this is taken into account when determining if the IRS takes a cut of your Social Security checks.
The fact these thresholds don't increase has meant that while originally fewer than 10% of retirees were taxed on Social Security, now upwards of half of all retirees lose part of their benefits. It means a growing number of seniors each year will see their incomes rise above the level at which they suddenly owe the IRS some extra money.
Since this isn't likely to change anytime soon, current and future retirees need to plan for the potential that they'll be taxed on benefits in the future, and should make sure they aren't counting on every dollar of Social Security to make ends meet.
