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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?

By MSN Money Partner Jul 10, 2012 12:49PM

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.

Image: Taxes (© Thinkstock/SuperStock)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.

 

More on Bargaineering and MSN Money:

Tags: Bargaineeringretirementretirement planningretirement savingsSocial Securitytax laws
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994Comments
Thomas Jefferson
Nov 26, 2012 4:38AM
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The Social Security pamphlet of 1936 read, "Beginning November 24, 1936, the United States Government will set up a Social Security account for you. ... The checks will come to you as a right." (http://www.ssa.gov/​history/ssb36.html).​ Americans were led to believe that Social Security was like a retirement account and that money placed in it was, in fact, their property. Shortly after the Social Security Act’s passage, it was challenged in the U.S. Supreme Court, in Helvering v. Davis (1937). The court held that Social Security was not an insurance program, saying, "The proceeds of both employee and employer taxes are to be paid into the Treasury like any other internal revenue generally, and are not earmarked in any way." In a 1960 case, Flemming v. Nestor, the Supreme Court said, "To engraft upon Social Security system a concept of ‘accrued property rights’ would deprive it of the flexibility and boldness in adjustment to ever-changing conditions which it demands." ~  Walter Williams.

 

The lies have not been a secret, we've been trying to tell you people for years.

Dennis Fischer (DFisch6)
Nov 13, 2012 12:13PM
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Heck no it was already per taxed before we got it. It is Taxation without representation
carollbr67
Jul 14, 2012 5:01PM
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No. The government  has embezzleded our savings and now they double tax to make up their thievery.

donaldtsmith
Jul 13, 2012 4:39PM
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hello?   what else is new? its a shock to see your tax on soc sec when this has stuggled through so many government acts to get it back;  . NUTS to this act.t
Phillip LUSK (The Other Side of The Coin)
Jul 13, 2012 11:37AM
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This money has been taxed one time already and you don't get to use it for many years. Why should it be taxed again if you live long enough to draw it? Aren't we paying enough sales taxes on SS payments when we have to buy stuff just to live?

Come on, just cut lots of the really unnecessary spending in government like you politicians always promise and things will get much better. ( probably would get you reelected without having to BS your way back in ) Tell the truth and you won't have to remember your lies.

Roadhouse Blues
Jul 12, 2012 10:10AM
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Mea Culpa, I forgot to mention a recent article that pointed out that during the Reagan administration, the SS income cap was adjusted, and it was projected that the SS fund would be solvent well into the future. Unfortunately, that projection was based on the assumption that future growth in workers' income would continue. Well, guess what? It hasn't. Jobs have been shipped overseas, and much of the income that used to go to the MIddle Class is now going to the Upper Class, where it is not subject to SS tax due to the income cap, so the Reagan-era projections are falling well short of where they should be. To me, this is a valid reason to increase the income cap and get that money back into the SS fund, as the people working for Reagan had projected (one of those people was named Paul Volcker, you may have heard of him)..

Roadhouse Blues
Jul 12, 2012 10:04AM
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Big Show: I began working and drawing a check subject to payroll tax in 1963 at age 18, out of high school, courtesy of the US Air Force, so I have now worked 49 years and paid in over $110K in SS tax. It was supposed to have been invested in government securities, and if it had returned just 4% compounded annually (not unreasonable, I have EE bonds at 4%), that would be a growth factor of 6.83. Given an average investment of $55K (1/2 of my $110K), I would have a balance of over $375K. I've read the average SS benefit is around $21,600/yr. If I begin taking my benefit at full retire age (not 62), with the remaining balance continuing to earn 4% growth, I would be 93 or older before it would be used up and I would need help from other peoples' payroll tax. (I set up an Excel spreadsheet and worked it out). What are the odds I will live to 93 or more? In spite of increased longevity, most people will not make 93 and therefore not collect what they should. Today's problem with the SS fund is primarily due to Congress as we all know, not longevity.

I have no problem with increasing the retirement age for younger workers given the increase in longevity.

I also think the income cap could be raised or eliminated, as with Medicare taxes, and provide significantly more funds, SS is a regressive tax as it is:

1. A nurse or mechanic making $40K/yr pays 6.2%

2. A corporate manager making $400K/yr pays 1.7%

3. A mediocre ballplayer making $5Meg/yr pays .14% (that's POINT 14%)

4. A hedge fund manager (the key word is "manager", not "investor") making $20Meg

or more per year pays 0%

I sincerely doubt that the wealthy who now control Congress will allow any significant change to the cap. However, should that come to pass, I would not support means testing, simply because in all sense of fairness, people should be able to benefit in proportion to what they contribute, and why penalize those who have been responsible in their working careers, passing up the new cars and cruises, and put that money into 401Ks or IRAs instead.

palinsafreak
Jul 12, 2012 10:02AM
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we should give more tax breaks to the very wealthy and let some, maybe a little  once every now and then trickel down to the little people. Romney needs a 16th mansion! dont you agree?  The rich should pay NO TAXES they are to important and it is beneath them!
palinsafreak
Jul 12, 2012 9:18AM
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I know you are but what am I? HAHAHAHA
cherokeemaid
Jul 11, 2012 11:34PM
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Pudney D, no thumbs down on your comment. When F.D.R. first started Social Security it was for the working men and women who didn't have a pension with the company that they worked for. This fund would give them something to have when they retired. And for the most part, it was a great idea until the greedy politicians took notice of all the money that was going into that fund, not to mention all the interest, too. So they decided to put a cap on the Social Security fund and what was left over was put into a General Fund so they could get their greedy paws on it. So the money that they have in this fund and which the politicians have used for everything but what it was intended for is really our money that they are really stealing from us. As far as I am concern, I think we should fire them all from the president on down. They have put us in debt, not for years, but for generations to come. And they expect us to bail them out. Nuts to that. It's time they took pay cuts and give up all their little perks. Time that they lived like the rest of us instead of high on the hog.Time that they face the problems that the rest of us face. See how they like it when they have to decide whether they eat or buy medicine. Or scrape together enough money for your bills and not have enough left to buy your kids some cheap shoes so they can go to school. America use to be respected but not any more. Out source the jobs. Send them over seas. Just don't expect the Americans that you put out of work to buy your products because we don't have the money to and we are not going into debt just so we can. Time to get off the soapbox. Could say more as there is a lot I feel the politicians could do to help the ones that put them into office and not their own greedy agendas. But it's late and I'm tired. Tax Social Security??? Hell No!!! 
Brad
Jul 11, 2012 11:17PM
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I remember hearing during the primaries about SS being a Ponzi scheme.  When SS was originally set up the average life expectancy was around 55 years old.  The benefits were not set to be dispersed until age 65.  The intent was to provide benefits only to those who live significantly beyond their working years.  Now that the average life expectancy is approaching 80 and the benefits are only now being moved upward towards 68 over the next couple of decades, it is little wonder that it is going broke.  I am not a fan of taxes but I do understand their necessity and need to limit them. 

 

In my estimation, they have become excessive relative to our expectation of production (growth of private industry).  It has been understood for years by the federal government (primarily, but not limited to, the Legislative Branch) that control of money constitutes control of people.  We the people are just now starting to see this culmination of 40+ years of government growth (Great Society of the 1960's).  We are at a cross roads as to whether we will have a limited government or largess government. 

 

The only way to truly limit taxes is to limit the ability of the government to spend money.  Limited spending authority results in limited control and limited taxes.  The federal government would then need to set priorities and optimistically, there may even be be a limited effort to cut some administrative costs.

 

Clarification:  My previous non-profit analogy of 20% administrative fees was interpreted as misleading.  SS spent over $6.5 Billion in administrative fees in 2010 and $3.5 Billion in Disability Insurance administrative fees in 2010.  Ezra Klein with Washington Post stated, "the main Social Security program are 0.6 percent of expenditures. The disability insurance program clocks in a bit higher: 2.3 percent" for those that are interested.

Tabasco Ed
Jul 11, 2012 2:24PM
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If they want to tax your benefits, why don't they just reduce them instead?  To give it to you and take it back is absurd.

 

Taxing going in, and taxing going out.  Well, they tax taxes all the time.  For example, you buy a bottle of liquor at the state store (or whatever they have in your state).  The majority of the sticker price of that bottle is alcohol excise tax.  But you pay a sales tax on the sticker price, not the pre-excise tax cost of the bottle.  So they are taxing the tax.  That's just one example, they tax taxes all the time.  That is absurd.

Fair and Unbalanced
Jul 11, 2012 2:12PM
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I think most posters are missing the fact that the vast majority of social security recipients (over 65%) don't pay any tax on their benefits.  If social security is someone's only source of income then they don't owe any tax on their benefits.  The wealthiest of social security recipients pay tax on the maximum 85% of their benefits and there is virtually no way around it for them.  However for the Average Joe caught somewhere in the middle that has social security income and investment income, with a little planning there are ways to minimize or even avoid incurring the extra tax on social security.  If you don't know the ins and outs find a knowledgeable tax preparer, a CPA, or a financial planner that understands tax planning and work with them during the entire year and not just when it's time to prepare your tax return...you might spend several hundred more dollars but it could save you thousands in taxes.  
jasemd1
Jul 11, 2012 1:50PM
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The rich don't need it. Why aren't they talking about this matter?
Ann Todd
Jul 11, 2012 1:43PM
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I don"t think Social Security should be taxed because it comes from our income that was earned and taxes was paid on it once already from the time you were working. Like most people I have to live off of Social Security now, which already is hardly enough to live off of in this present economy. They need  to reduce some of the raises that Senators, Represenatives, Congress men are giving themselves to balance the budget. I have a question why is it  when they are trying to balance the budget they always try to take it from our Social Security Benefits. We only draw an income according to how much we paid in. If you were a common laborer their checks are an average of  $600.00 per month.  It is hardly enough to live on, while they would like the public to beleive that the average American Citizen on Social Security get an average $1021.00 per month. I was so outraged when they cancelled our cost of living increase when they said that the average person recevies 1021.00 per month. I was so outraged that I wrote to Social Security and ask them where was the rest of my check since the average person gets $1021.00 per month. I informede them that I was missing about $400.00 per month. They wrote back and told me my check  figured according to what I had paid in at the time I became disabled to work. It seems as though our system is designed to keep the poor , even more poorer and the rich and greedy more richer. I am 60 years old i have watched as the rich greed close jobs down so they could move to other countries for cheaper labor. There greed is about to make America a third world country. When will the rich greed stop. It like the Banks that the govement bale out, that was suppose to help American home owners. The American home owners never saw a penny of it. Instead they wrote themselves Large retirement packages. They went on CNN and brosted that the Federal Govenorment should made guidelines because they knew they were greedy.
Someone (no forked tongue)
Jul 11, 2012 1:40PM
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SS was/is a huge con job to get the government more money, facilitated by the lie that the system will pay for itself and that you can expect to "retire" on your SS income.  Today the system is going broke because it does not pay for itself, and you have people who are trying to live on SS income of maybe $1000 a month---latter bought the lie hook, line and sinker.   Today the SS Administration is a bloated army of personnel and facilities sucking billions of dollars a year out of the system.   Is it a PONZI scheme----well, it certainly has operated like one.  It is time not to raise taxes for anybody---everyone who pays, pays too much----but it IS time to start cutting out all unearned benefits like welfare, food stamps, free housing, free food, etc., that has been used to keep people in a form of slavery under their political controllers.  Sorry to say, but we are talking here about the Democratic Party and how it exploits, controls, manipulates, and panders to the so-called "poor" folks. 
GRIFFINS' GUN SHOP
Jul 11, 2012 1:38PM
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The Government is out of control, We the People need to take America back and make it once again One Nation Under God. Our government today is worse than the Roman Empire was in Jesus day and our country is far worse than Sodom and Gomorrah was when it was destroyed by God. If it had not been for the blood sacrifice of Jesus who died on the cross of Calvary to pay for the sins of all of us who will believe and accept him, the world would not be here today as it is. However, with that being said, The Holy Bible says that in the last days we can tell when the end is near by the signs that the Bible has laid out for us, just as we can tell when the seasons are changing. No, this is not a Nostradamus, Hope indian or Mayan calendar perediction of the End of the World on December 21, 2012, but it is definitely a warning that it could be the beginning of the end for the world as we know it. There is a 7 year period before Jesus comes back to defeat satan and his armies and his people in the battle of Armageddon. The first 3 1/2 years will be tribulation and the sufferings that Gods people will have to endure at the hands of the ungodly. After that, the Rapture shall take place and all of those who are washed in the Blood of Jesus Christ shall be caught up and carried away to heaven (both the dead and those still alive). Then, the next 3 1/2 years will be the Wrath of God that is poured out upon all those ungodly unbelievers who are left here on Earth, in which there shall be such torments like has never before been known by mankind. When will that 7 year span begin? I don't know and nobody else on Earth does either, but going by the signs, there is nothing that says it cannot begin at any time, and 12/21/12 could very well be that beginning period. The important thing is to be saved by grace and ready to endure til the end when it does begin. I know this post will be ridiculed by many because of the majority of ungodly people in our world today who are desperately trying to drag as many of the Lost Souls that they possibly can to eternal destruction with them. However, I pray for those as well as everyone else in our world today that God would save them before it is too late. I am not a doomsday prophet, but it is my prayer that nobody should die and suffer in hades for all eternity, but instead have everlasting life in Heaven. Beware the wolves in sheeps clothing that will lead you to destruction, for if they are not for Christ, then they are against Christ as well as against all mankind. God only sees 2 kinds of people, the Saved and the unsaved. Which are you? When you are Saved you are not, nor will you ever be perfect, niether does God expect you to be perfect or sinless, however you are forgiven and chosen to be accepted into the Family of God at that time and God only sees his Son's sacrifice and blood, not your sins from that moment of salvation on forevermore. God Bless you all and may God save those that are lost.
Earl Lee (earl_Lee)
Jul 11, 2012 1:36PM
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How about we just fix the dang tax system, get rid of the class warfare, everyone pays the same rate up and down the line, then fire 95% of the IRS - How much would that save?
Itspeed
Jul 11, 2012 1:32PM
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Omg give is a break already were all tired of tax and being taxed were already paying for it, no need to pay for it twice,  Its like taxing a horse at both end,

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