Taxes on Social Security?

At the end of July, Former President Trump posted the following statement: “SENIORS SHOULD NOT PAY TAX ON SOCIAL SECURITY!”

Setting aside the messenger of the post, these 8 words generally cause one of three reactions.

First, people think it is a good idea. Afterall, why should we get taxed on a tax we’ve paid? Seems logical. We all have been paying into the system our whole working lives.

Second, people think it is a bad idea. To not tax the social security income, especially that of financially secure seniors, would cost the entire program tons of money. Estimates would be $1.6 to $1.8 Trillion dollars through the year 2035. 2035 is an important year for Social Security since that is the year it is projected to only be able to fund 80% of promised benefits.

Last response goes like this., A pause followed by the shock and the following phrase: “Wait?! What?! Our Social Security checks are subject to income tax?!”

That one is by far the most common one I have heard. It was my first response when plowing through IRS code and going through the IRS training to become a Certified Income Tax Filer. 

Most of us have no idea that this is the case and most think it makes absolutely no sense. 

But there it is. Up to 85% of your Social Security could be subject to income tax if your combined income is over $34,000 for a single filer or $44,000 for those filing joint.

https://www-origin.ssa.gov/benefits/retirement/planner/taxes.html

Combined income includes income from retirement accounts, non-taxable interest and 50% of your Social Security benefits. Given that the average benefit floats close to $2000/month this means you can only have about $20,000 a year of additional income before Uncle Sam says, “thank you" and takes back some of your benefit. 

Like most things, it is not a simple thing to just say, “no more taxes on Social Security.” There is a financial complexity to our entire system, for better or worse. It also highlights the complexity of something like Retirement and making sure the approach your advisor is taking with you accounts for this additional tax on your post-working years income. There is a lot more at play than the simple approach of having 10x your income or $1.5million in the bank.

But, there you go - your Social Security benefit is subject to income tax.

Here is the link to the original article.

https://401kspecialistmag.com/trump-calls-for-elimination-of-social-security-tax/

As always, if you come across a financially related article you’d like to send my way please do! 

Best place to send them is to me.

More next time!

J

P.S. Some states subject your benefit to income tax too.