Despite adjustments to income tax brackets and rates under the recently enacted tax reform legislation, an increasing number of retirees find 50% of more of their Social Security benefits subject to federal taxes. That’s because the income thresholds governing the taxability of Social Security benefits have remained static for decades and have not been adjusted for inflation.
The taxation of Social Security benefits was first introduced in the Social Security Amendments of 1983 as part of a broader package designed to raise revenue and cut long-term costs for the Social Security program. In 1993, a second tier was added through the Omnibus Budget Reconciliation Act (OBRA), allowing up to 85% of a beneficiary’s Social Security income to be exposed to federal income tax.1 While this only represented 3.4% of the $957.5 billion in Social Security revenue collected in 2016,2 more than 50% of retirees are now subject to these taxes, up from 1 in 10 households when the tax was first established.3
How Social Security Benefits are Taxed
- Individuals with a combined income of $25,000-$34,000 are subject to income taxes on up to 50% of their Social Security benefits. Those with more than $34,000, can expect to pay taxes on up to 85% of their Social Security benefits.
- Married couples filing jointly with a combined income of $32,000-$44,000 are subject to income taxes on up to 50% of their Social Security benefits. Those with more than $44,000 in combined income can expect to pay taxes on up to 85% of their Social Security benefits.
In this context, the IRS defines “combined income” (also known as “provisional income”) as:
Adjusted Gross Income (AGI) + Nontaxable Interest + 1/2 of your Social Security benefits
Currently, no one pays taxes on more than 85% of their Social Security benefits.4
In addition to federal taxes,13 states tax Social Security benefits. While Vermont treats Social Security benefits the same as the federal government, certain other states tax Social Security benefits only if income exceeds a state-specified threshold. For example, Connecticut taxes Social Security benefits if your income tops $50,000, or $60,000 if you’re married filing jointly.5
For many retirees, a comprehensive approach to planning that encompasses tax, investment and Social Security planning may help limit or reduce the burden of Social Security taxes. Contact the office today at 775-789-3123 to schedule time to talk about ways to help reduce your tax exposure in retirement.
Steve Lindquist is a registered representative offering securities and advisory services through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity. Registered address: 9600 S McCarran Blvd., Reno NV 89523.
Investments are not deposits; not NCUSIF insured; and not insured by any federal government agency. No credit union guarantee. May lose value.
Investors should consider the investment objectives, risks, charges and expenses associated with municipal fund securities before investing. This information is found in the issuer’s official statement and should be read carefully before investing.
Investors should also consider whether the investor’s or beneficiary’s home state offers any state tax or other benefits available only from that state’s 529 Plan. Any state-based benefit should be one of many appropriately weighted factors in making an investment decision. The investor should consult their financial or tax advisor before investing in any state’s 529 Plan.