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Social Security & Medicare Questions Q: Is it fair to tax our Social Security benefits when we have paid Social Security taxes throughout the years we worked? Isn't that double taxation?-B.K. Taunton, MA A: The tax on Social Security benefits affects single taxpayers with incomes above $25,000 and married couples with incomes above $32,000. If incomes are more than $25,000 but less than $34,000 (single), or more than $32,000 but less than $44,000 (couples), up to 50% of Social Security benefits are counted as taxable income. For taxpayers whose incomes are more than $34,000 (single) or $44,000 (couples, up to 85% of Social Security benefits may be counted as taxable income. Critics say this is double taxation. Proponents say that the tax is justified because under federal law, individuals receiving payments from a private pension plan pay income tax on the amount by which the pension payments exceed the amounts they paid into the pension plan. Numerous Congressional Budget Office (CBO) analyses have reported that on average, approximately 85% of the Social Security benefits that beneficiaries receive represent amounts in excess of what they paid into the system through the employee share of the payroll tax. Proponents say according the same tax treatment to Social Security benefits as private pensions would entail making approximately 85% of Social Security benefits taxable. Critics counter that currently there's no determination of when Social Security benefits exceed what was paid in-the tax applies from the first dollar in benefits collected over the income limits, even when benefits are first started. Critics also point out that unlike other aspects of the tax code (such as wages and personal exemptions) the income levels outlined above are fixed, not indexed to inflation. They have been in effect with no increase since enacted in 1983 under President Reagan, meaning increasing numbers of retirees are affected. This article first appeared in Volume 6, Issue 1 of "The Social Security and Medicare Advisor" newsletter (November/2000). To receive future editions of "The Advisor" in its special, free e-mail version, please click here. | ||||||||
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