A Shock for Many Retirees: Social Security Benefits Can Be Taxed

Social Security benefits weren’t taxed at all until 1984. Then in 1993, Bill Clinton signed legislation that expanded tax thresholds, making up to 85 percent of benefits taxable for recipients with combined incomes of more than $34,000 ($44,000 for joint filers). Those who earn less could be subject to taxes on up to 50 percent of their benefits. Combined income consists of a filer’s adjusted gross income, untaxed interest (such as from municipal bonds) and half of one’s annual Social Security payments.

Over the past 39 years, both Social Security payments and federal income tax brackets have continually shifted upward to compensate for inflation — but the income thresholds that result in a retiree’s benefits being taxed have not. When the tax took effect in 1984, during the Reagan administration, it was estimated to affect about 10 percent of Social Security recipients. By 2022, 48 percent of recipients were paying tax on some of their benefits, and paid $48.6 billion that year, according to the Social Security Administration. Most states do not apply state income taxes to Social Security benefits.

“Because the cutoff isn’t benchmarked to inflation, more and more beneficiaries are subject to the tax,” said Anqi Chen, assistant director of savings research for the Center for Retirement Research at Boston College. One consolation is that even at higher income levels, some portions of benefits aren’t taxed at all, with the rest taxed at the filer’s ordinary tax rate, Ms. Chen said. That produces an average effective tax rate of about 6.6 percent, she said, “which is not nothing, but it’s also a small percentage.”

The result is that a single filer collecting the average $1,844.76 monthly benefit could be taxed on up to half of her Social Security benefits if her annual total earned income — from wages, a pension, withdrawals from taxable retirement accounts, interest payments, gambling winnings, or any other taxable source — was just below $14,000. Add another $9,000 of income, and that filer would face taxes on up to 85 percent of her benefits. For joint filers, the tipping point is about $9,900 to hit the 50 percent tax threshold, and it’s a bit less than $22,000 for the 85 percent threshold.

For a clearer picture of the tax liability that they could face, retirees can refer to the calculator called “Are My Social Security or Railroad Retirement Tier I Benefits Taxable?” on the I.R.S. website.