With No Inflation Adjustments in 40 years, More Social Security Beneficiaries Are Paying Federal Income Tax on Their Benefits
Edward A. Zurndorfer
Before 1983, Social Security benefits (retirement, survivor and disability) were not taxed by the federal or any state government. As part of the major changes to Social Security that Congress enacted during 1983, a portion of benefits were to be subject to federal income tax. Congress’ purpose in taxing benefits was to use the tax revenue to help fund the Social Security retirement and disability trust funds.
Congress decided that it would not be fair to tax all Social Security beneficiaries. The intent was to tax only those beneficiaries whose income exceeded certain levels and were not totally dependent on Social Security benefits as their source of retirement income.
The amount of an individual’s Social Security benefit that are taxed depends on the total amount of the benefit and other income. The higher the total income amount, the greater the taxable part of the Social Security benefits.
Initially, for the period 1983 to 1993 50 percent of an individual’s Social Security benefits was potentially included in income, potentially subject to federal income tax in either of the following situations:
In 1993, a second level income threshold was added; namely, $32,000 (single tax filers) and $44,000 (married filing joint tax filers) at which point would include 85 percent of a Social Security benefit includable in income.
The first step for determining how much of an individual’s Social Security benefit is includable in gross income and potentially taxable is the computation of the individual’s “provisional income” for the year. The following worksheet presents the “provisional income” computation:
The next step is to calculate how much of the Social Security beneficiary’s “provisional income” exceeds statutory thresholds, or base amounts. The base amounts depend on the individual’s tax filing status. The following three charts summarize the algorithm for determining the percentage of benefits are includable in income:
Tax Filing Status: Single, Head of Household, Qualifying Widow(er)
| Provisional Income | Amount of Social Security Benefit Includable in Income and Potentially Taxable |
| $25,000 or less | No amount of Social Security benefit includable in income |
| $25,001 – $34,000 | Lesser of: (1) 50% of Social Security benefit or (2) 50% of provisional income above $25,000. |
| More than $34,000 | Lesser of: (1) 85% of Social Security benefit or (2) 85% of provisional income above $34,000 plus lesser of (a) $4,500 or (b) 50% of Social Security benefits. |
Tax Filing Status: Married Filing Joint
| Provisional Income | Amount of Social Security Benefit Includable in Income and Potentially Taxable |
| $32,000 or less | No amount of Social Security benefit includable in income |
| $32,001 – $44,000 | Lesser of: (1) 50% of Social Security benefit or (2) 50% of provisional income above $32,000. |
| More than $44,000 | Lesser of: (1) 85% of Social Security benefit or (2) 85% of provisional income above $44,000 plus lesser of (a) $6,000 or (b) 50% of Social Security benefits. |
Tax Filing Status: Married Filing Separate1
| Provisional Income | Amount of Social Security Benefit Includable in Income and Potentially Taxable |
| Any Amount | Lesser of 85% of Social Security benefit or 85% of provisional income |
1 Assumes individual lived with spouse at any time during the year. If individual did not live with his or her spouse at any time of the year, the taxable portion of Social Security benefit is computed as though the individual is filing as single.
Some observations from the charts: (1) The provisional income “thresholds” ($25,000, $32,000, $34,000 and $44,000) are rather small. This means that in 2022 many Social Security beneficiaries are including at least 50 percent of their annual benefits in gross income on their federal income tax returns; and (2) The provisional income ‘thresholds” for individuals who file as single, head of household, or qualifying widow(er) are not doubled for individuals who are married filing joint ($25,000 to $32,000 and $34,000 to $44,000). Perhaps Congress’ original intent in 1983 in setting these provisional income thresholds for married individuals filing joint was that in 1983, there were few two income households. In 1983, most households only one spouse had earned income while the other spouse was a stay-at-home mom or dad, probably a mom. Therefore, there was no need to double the single provisional income thresholds for married couples. That may have been true in 1983, but 40 years later in the majority of married households both spouses are working. Can this dearth in the threshold amounts for married couples be interpreted as another example of a marriage “tax penalty”?
The more obvious problem associated with the provisional income thresholds over 40 year is that the thresholds have never been adjusted for the cost-of-living. In the meantime, Social Security benefits since 1975 have received annual cost-of-living adjustments (COLAs). These COLAs can be viewed at https://www.ssa.gov/OACT/COLA/colaseries.html. In only three years (2009, 2010 and 2015) there was no COLA due to low inflation. The highest COLA between 1983 and 2022 was 8.7 percent in 2022.
Applying the annual COLAs over the 40-year period 1983-2022 on a compound basis, Social Security monthly benefits have increased a total of 300.43 percent during the 40-year period. According to a Fact Sheet put out by the Social Security Administration, 47.9 million retired workers during 2022 received $80 billion of retirement monthly benefits with an average monthly benefit of $1,669. Forty years ago, that same average monthly benefit would have been $556.
Had the provisional income threshold amounts been subject to the same COLA over the 40-year period as were Social Security benefits, the threshold amounts would much 300.43 percent higher, as shown in the following table:
| Provisional Income Threshold Amount | 300.43% Adjustment Amount |
| $25,000 | $75,108 |
| $32,000 | $96,138 |
| $34,000 | $102,146 |
| $44,000 | $132,189 |
With no annual adjustments in the provisional income thresholds, an increasing number of Social Security beneficiaries are including 50 percent (and many 85 percent) of their Social Security benefits in income. According to a House Ways and Means Committee report in 2004, when the 1983 Social Security amendments went into effect, about 8 percent of Social Security beneficiaries were required to pay income tax on part of their Social Security benefits. The percentage has increased over time as a result of the threshold amounts being set in nominal dollars rather than indexing them to price or wage changes in the national economy. By 1993, an estimated 20 percent of beneficiary families paid income tax on part of their Social Security benefits. Subsequent estimates by the Congressional Budget Office (CBO) put the percentage of Social Security beneficiaries paying tax on their benefits at: (1) 25 percent in 1997; (2)32 percent in 2000; and (3) 39 percent in 2003. More recently in 2014, CBO estimated that 49 percent of Social Security beneficiaries pad income tax on their benefits. In 2022, the percentage is likely over 50 percent.
One possible reason why the percentage of Social Security beneficiaries paying tax on a portion of their benefits has increased over 20 percent since 2000 is a result of the removal of the “earnings-test” for Social Security beneficiaries once they reach their full retirement age. Prior to that 2000 change, a Social Security beneficiary had to wait until age 70 in order to not be affected by the Social Security “earnings test”. Many Social Security beneficiaries upon reaching their full retirement age are working, earning a decent salary while receiving their full amount of Social Security monthly benefits. The result is that these full-time working beneficiaries together also benefiting from average investment income (during the most bull market over the last 20 years) will far exceed the upper provisional income threshold amounts, resulting in these beneficiaries having to include the maximum 85 percent of their Social Security benefits in income subject to federal income tax.
According to a recent Social Security Fact Sheet, Social Security is the major source income for most of the elderly, representing 30 percent of the income of the elderly. Politicians in Washington have long said that Social Security is not a retirement system. The purpose of an individual’s Social Security retirement benefit is to supplement the individual’s other retirement income including pensions, defined contribution plans such as 401(k) and 403(b) plans and IRAs. While many working individuals (including self-employed individuals) have gotten that message; that is, they have saved resulting in sizeable retirement accounts in defined contribution plans, and traditional IRAs, many individuals have not. The latter individuals unfortunately depend almost entirely on Social Security benefits to sustain them economically throughout retirement. With most Social Security beneficiaries having them to pay some federal income (and in several states, state income) taxes and have monthly Medicare Part B and Medicare Part D premiums deducted from their monthly Social Security check, there is less Social Security retirement income left to pay their expenses during retirement.
It was not Congress’ intent 40 years ago to tax the Social Security benefits of individuals who could least afford to pay the tax. Now 40 years later the same individuals who are least likely to be able to afford paying tax on their benefits have significantly increased. There is some talk in Washington of raising the upper threshold percent to 100 percent from the current 85 percent as a way of helping to sustain the Social Security trust funds. Without raising the provisional income threshold amounts and with increasing Medicare Part B and Medicare D monthly times over time, the result will be a reduced “net” Social Security benefit (gross Social Security benefit less Medicare Part B and Medicare Part D premiums less tax liability) for most Social Security beneficiaries. And with inflation expected to continue over the next few years, indexing the provisional threshold amounts to inflation would go a long way to help middle class senior citizens keep more of their needed Social Security benefits.
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