Social Security is a foundational governmental assistance program for the nation. Over 70 million Americans receive benefits from the Social Security Administration (SSA), with the majority of these payments being made to retired individuals. With tax season upon us, generally speaking, retired individuals are not receiving enough of an income to need to pay income tax. However, if your retirement income does exceed a certain limit, the IRS is entitled to tax your social security benefits.
SSA: Providing support for millions of Americans
While social security is mostly known for the support it provides for retired Americans, it also provides financial relief for those who have very little income, as well as for people who are limited in terms of what they can do to earn a living due to being disabled. This year, an estimated $1.6 trillion in benefits is expected to be paid out. The average retiree receives just under $2,000 per month while the average person receiving disability payments receives just over $1,500 per month.
Nine in 10 retirees as of 2024 receive a Social Security payment. For people over the age of 65, 31% of their income is attributed to Social Security. Due to the vital importance of the Social Security fund in supporting the retired population, any changes that are suggested to the fund are often met with resistance. This is a problem, as the Social Security fund requires massive changes in the future to ensure its longevity.
The IRS may claim your SSA benefits
Social Security payments being subject to tax did not used to exist. However, this changed in the 1980s when the fund was facing problems maintaining its longevity. As a solution, the government required that Social Security income be taxed if your total retirement income fell into a certain bracket. It has operated like this ever since, with no changes to the tiers occurring since they were first implemented over 40 years ago.
The IRS determines if your Social Security benefits should be subjected to tax based on a number of criteria. Your marital status is taken into account, as well as your provisional income. They also include nontaxable interest you may have incurred if you own municipal bonds, as well as half your annual Social Security benefit. Taking into account all of this, the following tax brackets are used by the IRS for Social Security benefits being taxed:
- Single, with a provisional income less than $25,000: 0% of benefits taxable
- Single, with a provisional income between $25,000-$34,000: Up to 50% of benefits taxable
- Single, with a provisional income over $34,000: Up to 85% of benefits taxable
- Married, with a provisional income less than $32,000: 0% of benefits taxable
- Married, with a provisional income between $32,000-$44,000: Up to 50% of benefits taxable
- Married, with a provisional income over $44,000: Up to 85% of benefits taxable
It is important to note, however, that this does not mean that you will have 85% of your benefits taken away. It is based on what your benefits would be taxed on depending on which bracket you would fall into under the regular income tax brackets. This means that whatever income tax bracket you fall into, the IRS can apply that percentage to 85% of your Social Security benefits.
Major changes needed for the SSA
While most seniors do not support the taxation of their benefits, the longevity of the SSA retirement fund is dependent on this taxation. Currently, the retirement fund is expected to be depleted by 2033. With the new Trump administration working to eradicate taxes on Social Security benefits, this could be even sooner if passed by Congress. Many economists have suggested that the best way to preserve the longevity of the fund is to either increase the taxes on benefits or to reduce the amount of benefits paid out to current beneficiaries.
