Retirement Blog

Finance Blogs » Retirement » Social Security tax bites

Social Security tax bites

By Jennie L. Phipps · Bankrate.com
Tuesday, April 24, 2012
Posted: 5 pm ET

In any discussion about putting Social Security on a more even keel, the first suggestion that comes up is usually requiring those people who make more than some threshold to pay more -- and, perhaps, get less.

Just for the record, people who earn more in retirement already get less Social Security because they have to pay taxes on their benefits.

Social Security says 34 percent of recipients pay taxes on their Social Security. Whether or not you pay taxes on Social Security is based on what Social Security calls “combined income,” a calculation that is unique to the administration. You take your adjusted gross income on your 1040 federal tax return -- line 37 -- and add in any tax-exempt interest you receive and half of your Social Security benefits.

If you're single and your combined income is less than $25,000 or you're married and your combined income is less than $34,000, you don't pay anything. If your combined income is between $25,000 and $34,000 for single people or between $34,000 and $44,000 for couples, half your Social Security benefits will be taxable. If you earn more than these thresholds, 85 percent of your benefits are taxable -- you never pay on more than 85 percent of your benefit.

The way many moderate-income people reach the level where their benefits are taxable is by hitting age 70 1/2,  when they must take required minimum distributions, or RMDs, from their tax-advantaged retirement savings, including individual retirement accounts.

For example, if you're getting the maximum benefit at age 66, full retirement age, of $2,513 per month or $30,156 a year, even without cost of living adjustments, when you reach 70 1/2 and face RMDs, you're likely to be pushed into the 25 percent tax bracket, especially if you're married and filing jointly -- even though you're not what most people would consider a high-income earner living in the lap of retirement-planning luxury.

While this person is, on paper, entitled to very generous Social Social benefits, the amount of money he's pocketing is significantly reduced by taxation. In the 15 percent effective tax bracket, as much as $4,534 of Social Security goes back to the federal government, and some states also tax Social Security. Someone in the 25 percent effective tax bracket will pay $7,539 back to the government plus whatever the state tax bite is.

It's a big leveling factor that would have to be considered in any rejiggering of the plan, especially if those who earn more than the current Social Security cap of $110,600 a year are expected to pay more.

«
»
Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
7 Comments
Mary
June 15, 2012 at 1:26 pm

I recently found out that I could have been getting my husbands social security benefits at age 60. I am a 62 year old widow. I have always worked and had my own social security. I missed out on a $24,000.00 benefit. I'm looking into retroactive payment as I retired at age 60. Has anyone ever received a retroactive widow benefit? I live in Calif and need a good lawyer that specializes in social security cases. Does anyone have any ideas besides just giving up?

Big Al
May 07, 2012 at 5:40 pm

When Obama extended the Bush tax cut and reduced the SS tax by 2% for earned income people, he forgot to extend it for people getting a corp pension.
My taxes went up $45 mo the following Jan.
The Golden rule still applies in america, "THE PEOPLE WITH THE GOLD MAKE THE RULE". And yes there is noone in washington pulling for the middle class, no matter what there campaign slogan is. Doesn't matter who is in congress or the white house, they all know who lines there pockets with gold.
Therefore nothing will ever change for the middle class, the 99% is stuck in this middle class Capitalist Society. After all we, the middle class, caused this economic disaster, right?

Juneau
May 04, 2012 at 11:03 pm

What the Hey Ernie. Obama care hasn't kicked in yet, the racketeers in the health insurance and the medical care field are still in control. John McCain gets a $50,000 dollar a year government pension and pays no taxes on it. McCrystal gets $170,000 dollar a year government pension and pays no taxes on it. We don't have enough folks lobbying in Washington for middle America. wealthy folks are not supposed to pay taxes, that is for the poor folks. whiteagle38

Ernie
May 02, 2012 at 5:22 pm

What a rip-off! They start taking social security from your 1st pay check, interest free. Your employer also has to match that number, interest free for 50 years. Now I am 66 years old, still have a mortage, a car payment, a 100 grand in private student loans for my son who graduated from med school , with honers, but cannot find a job, in large part because of Obama care, I have all the financial responsibility that I had when i was 21, but, because I want to work, make over 50 grand a year, without my ss check, 85% of that is taxable. social security should be tax exempt period, no matter how much money you earn, you paid into it all your working life, they give it, no charge to illegals, fake disability claims,politicians who do not pay into it and lord knows what else, let those that paid keep 100% of their benefits, hell where still paying into it as long as we work, we also have private employer funded insurance which keeps off the medicare rolls, when the hell does the working class get a break????????????

Rose T
April 28, 2012 at 11:06 am

So what is the workaround fix for RMD's?

coffee man
April 25, 2012 at 10:12 am

You just quoted the Democratic party mantra.

Omar T
April 25, 2012 at 9:24 am

My word. Those who pay MORE into the system should be paid LESS. And this is acceptable because they PAY more taxes on the benefits they receive. Yep. That's the conventional wisdom. Let those who PAY MORE get paid LESS. So, if I buy more food I should get less food. If I pay MORE for insurance I should get LESS coverage, LESS benefits. If I pay MORE for a car I get a hooptie. It makes all the sense in the world!!!!