Retirement Planning > Social Security

Don't Forget: Your Clients' Social Security Benefits Are Taxed

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Helping clients avoid the taxation of Social Security benefits is a tall order for any financial advisor because the income thresholds that subject clients to such taxation are set low. They were never indexed to inflation as are Social Security benefits, with their cost of living adjustments, or the incomes of high earners subject to the Medicare surcharge, or income tax brackets.

When taxes on Social Security benefits were introduced in 1983, the income thresholds “were intentionally not indexed” to inflation even though it was projected that “more and more people” would have to pay those taxes due to “increases in real income or inflation” and “Congress intended the taxation of benefits should not affect ‘lower income’ individuals,” according to the Social Security Administration.

Today, single retirees with incomes above $25,000 and couples filing jointly with provisional  incomes above $32,000 are subject to taxation of their Social Security benefits. If the thresholds had been adjusted for inflation, those levels would be about 2.5 times as high — about $63,000 for singles and $81,000 for couples filing jointly, according to The Senior Citizens League.

These taxes are levied on taxpayers’ “provisional income,” which the IRS defines as the sum of adjusted gross income, nontaxable interest and 50% of Social Security benefits.

Up to 50% of benefits are taxed for individuals with incomes just above the base amount of $25,000 and for couples with incomes above $44,000. For individuals with incomes above $34,000 and couples with incomes above $44,000, 85% of their Social Security benefits are taxed.

The Social Security site says benefits are “usually” subject to federal taxation if recipients have “other substantial income” in addition to benefits, but “few people today think of an adjusted gross income of as little as $25,000 to $32,000 as ‘substantial’ income,” says Mary Johnson,  Social Security and Medicare policy analyst for The Senior Citizens League.

The league supports The Social Security 2100 Act, sponsored by Rep. John Larson, D-Ct., which would raise the income thresholds at which Social Security benefits are taxed to $50,000 for single filers and to $100,000 for joint filers.

A league survey of 417 Social Security recipients found that half were subject to taxation of their benefits and 55% support legislation to raise taxation thresholds. Twelve percent oppose the change. Revenues raised from taxing Social Security benefits are deposited into the Social Security and Medicare trust funds, which are poised to face depletion in 15 years and six years, respectively.