NCPA - National Center for Policy Analysis

High Marginal Tax Rates On Seniors

August 10, 2000

In 1983, Congress imposed taxes on up to half the benefits of Social Security recipients with "modified adjusted gross income" over $25,000 for singles and $32,000 for couples. In 1993, it added a second tax tier. Single retirees with income above $34,000 and couples with income over $44,000 have to add 85 cents in benefits to taxable income for every dollar of income above these thresholds until 85 percent of benefits are taxed.

Actually, the Social Security benefits tax is a tax on other retirement income. Above the first threshold:

  • The first tax tier means that earning an extra dollar of interest, dividends or wages boosts taxable income by $1.50.
  • This means that if the retiree is in the 28 percent tax bracket, each added dollar of income is taxed at a 42 percent rate.

For retirees with income over the second threshold:

  • If the retiree is in the 28 percent tax bracket, the effective marginal tax rate on additional income is 52 percent.
  • If the added income is wage income, for a couple age 65 or over in the 28 percent income tax bracket, payroll taxes and the benefits tax can push their marginal tax rate to 64 percent.
  • And due to the earnings penalty still in effect on early retirees, working beneficiaries in the 15 percent income tax bracket face a marginal tax rate of up to 83 percent, exclusive of state tax.
  • Thus, for a beneficiary in the 28 percent tax bracket, the added tax can be greater than the added wages -- a tax rate exceeding 100 percent!

Source: Stephen J. Entin (Institute for Research on the Economics of Taxation), "Reducing the Social Security Benefits Tax," Brief Analysis No. 332, August 10, 2000, National Center for Policy Analysis.

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