Almost half of all households that receive Social Security benefits might pay taxes this year on a portion of their benefits, according to a just-released national survey by The Senior Citizens League (TSCL).
“Making matters worse, the survey indicates that retired and disabled taxpayers are more uncertain than ever about their tax liability this year,” says Mary Johnson, a Social Security analyst for TSCL.
Just over half of survey participants (51%) said they did not expect to pay taxes on their benefits. “That’s pretty much in line with what we expected,” Johnson notes. The other half, however, were much more conflicted than usual about whether their benefits would be taxable or not.
Early survey findings indicate that less than one-quarter of survey participants, (24%), said they would definitely owe taxes on their benefits, versus the 47% who reported paying taxes on Social Security benefits in a survey conducted after tax season, last fall.
There’s also considerable uncertainty about the potential amount of tax on Social Security benefits. About 42% of those who thought they would owe taxes on benefits thought their tax obligation would be higher than last year. However, 53% weren’t sure if the amount would be higher or lower.
In 2020, the Congressional Research Service estimated that the average amount of federal income taxes owed on Social Security benefits would be about 6.6% of Social Security benefits. While the tax varies by income, households affected were expected to pay, on average, an estimated $3,211.
In addition to federal taxes, 12 states, according to AARP, also tax some or all of their residents’ Social Security benefits: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont and West Virginia. State policies on taxing benefits vary widely.
“Congress has never adjusted the income thresholds that subject Social Security benefits to taxation since the tax became effective in 1984”
Mary Johnson, TSCL
Unlike federal income taxes, the federal revenues received from taxation of Social Security benefits are credited to the Social Security and Medicare Trust Funds. “Even more unlike other federal income taxes, Congress has never adjusted the income thresholds that subject Social Security benefits to taxation since the tax became effective in 1984,” Johnson notes.
The lack of adjustment has led to both a growing number of Social Security recipients who pay the tax and a growing amount of their benefit that is subject to taxation. When the tax on benefits became law, fewer than 10% of beneficiaries paid income taxes on their benefits. In 2015, research by the Social Security Administration projected that as many as 56% of households receiving Social Security benefits will pay taxes on a portion of their benefits in coming years.
Up to 85% of Social Security benefits can be included in the taxable income of recipients whose “provisional” income exceeds the income limits. Provisional income is determined by adding the adjusted gross income, plus otherwise tax-exempt income, plus 50% of Social Security benefits. (AGI + tax-exempt income + 50% of Social Security benefits = provisional income).
Social Security benefits are taxable for single filers with provisional incomes of more than $25,000 and married couples filing jointly with provisional incomes of more than $32,000. “Had these income thresholds been adjusted for inflation since 1984, the $25,000 level would today be about $68,400, and the $32,000 level would be $87,550,” says Johnson.
Social Security Trustees have estimated in the 2021 annual report that the Social Security Trust Fund will receive $34.5 billion in revenues from the taxation of Social Security benefits in 2021 and that will jump to more than $45 billion for 2022. “That big jump is primarily due to the rising number of new retirees with higher incomes and does not factor in the impacts of the 5.9% cost-of-living adjustment received in 2022 because that affects taxes paid in the 2023 tax season,” Johnson notes.
Johnson recommends that Social Security recipients remember to check the impact of this year’s 5.9% COLA on next year’s estimated tax obligation. “It may be preferable to have taxes withheld throughout the year to avoid a big bill at tax time or worse, an underpayment penalty,” Johnson says.
Social Security recipients may request money to be withheld from Social Security benefits by filing Form W-4V with the Social Security Administration, requesting to have 7%, 10%, 12% or 22% of their monthly benefit withheld for taxes. Retirees can also have taxes withheld from other income, such as IRA withdrawals or a pension. Finally, some taxpayers might opt to send quarterly estimated tax payments to the IRS with Form 1040-ES.
The Senior Citizens League is working for passage of Social Security legislation that would adjust the income thresholds that subject Social Security benefits to taxation. “This tax on benefits was never intended to affect low- and middle-income retired and disabled Americans,” Johnson says.
SEE ALSO:
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