NCPA - National Center for Policy Analysis

Another Double Tax Dose: Social Security Benefits Tax

January 22, 2003

Until 1983, health, disability, survivor and retirement benefits were tax free. That is no longer true. In 1983, Congress decided to tax some retirement benefits, and the result is that a growing percentage of moderate-income Social Security beneficiaries face tax rates of 50 percent or more.

Here's how it works:

  • If the combination of half of your Social Security income plus your adjusted gross income from other sources plus your tax-free income from municipal bonds exceeds $25,000 for singles or $32,000 for couples, a portion of your Social Security benefits will be taxed.
  • In 1993, the portion of Social Security benefits that is counted was raised from 50 percent to 85 percent, creating some of the highest marginal tax rates in America.
  • Those $25,000 and $32,000 tax points have been the same since 1983, not indexed to inflation.

The so-called Social Security benefits tax is hitting an increasing number of seniors, and a growing amount of Social Security benefits are being reported as income:

  • In 1985, just two years after the passage of the tax, 3 million tax returns showed $9.6 billion of Social Security income in their adjusted gross incomes.
  • By 2000, the figures had ballooned to 10.6 million returns showing $90 billion of Social Security income.

This means that millions of people who plowed money into tax-deferred accounts to save 27 percent in taxes will take out dollars taxed at 50 percent.

Source: Scott Burns, "Double taxation takes many forms: Cutting the levy on Social Security benefits would boost economy," Dallas Morning News, January 21, 2003.

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