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.