NCPA - National Center for Policy Analysis


September 7, 2004

The Social Security benefits tax is a complicated animal, but is relatively uncommon because so many retirees have less than modest incomes, says Dallas Morning News personal finance columnist Scott Burns. Besides, says Burns, there are ways to reduce its effects.

  • The benefits tax requires retirees to pay income taxes on a portion of their Social Security benefits; the taxed portion varies depending on income level.
  • The benefits tax kicks in when half a retiree's Social Security benefits plus income from other sources exceeds $32,000 for couples or $25,000 for singles.
  • If a retired couple's income (half his Social Security plus other income) is between $32,000 and $44,000, they must pay income taxes on $500 of Social Security benefits for each $1,000 of additional income.
  • If the couple's income is higher than $44,000, a retired couple must pay income taxes on $850 for every $1,000 of additional income earned.
  • The benefits tax is capped such that the highest earning retirees must pay income taxes on a maximum of 85 percent of benefits.

There are ways to reduce the impact of the Social Security benefits tax. Economist Laurence J. Kotlikoff has suggested that many workers should pay taxes today and put some of their retirement assets in Roth IRA, which can be withdrawn tax free after retirement. Additionally, workers with conventional assets should think about turning them into a life annuity and reduce their taxable income, explains Burns.

Source: Scott Burns, "A Social Security tax puzzle: Evading the gauntlet is possible, but it's complicated," Dallas Morning News, September 2, 2004.


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