Why are Social Security benefits taxable?

If as many people believe, they paid for their Social Security, they earned the benefit, they are entitled, why is Social Security subject to income tax? After all, no money you save (other than pre-tax) is subject to income tax when you take it from the bank.

According to the Social Security website:

Originally, Social Security benefits were not taxable income. This was not, however, a provision of the law, nor anything that President Roosevelt did or could have “promised.” It was the result of a series of administrative rulings issued by the Treasury Department in the early years of the program.

In 1983 Congress changed the law by specifically authorizing the taxation of Social Security benefits. This was part of the 1983 Amendments, and this law overrode the earlier administrative rulings from the Treasury Department.

Of course the fact is we have not paid for our own Social Security, we paid a tax that was and still is inadequate to provide promised benefits. To be truly accurate, Social Security should be exempt from taxation up to the point our benefit payments do not exceed the total we contributed during our working lives. Beyond that it should be fully taxable just as any pension paid for by someone else is taxable as ordinary income.

Instead we have a system that excludes certain individuals from paying any taxes and taxes up to 85% of the Social Security benefit based on total income.

Here is how it works:

IRS Tax Tip 2011-26, February 07, 2011

The Social Security benefits you received in 2010 may be taxable. You should receive a Form SSA-1099 which will show the total amount of your benefits. The information provided on this statement along with the following seven facts from the IRS will help you determine whether or not your benefits are taxable.

How much – if any – of your Social Security benefits are taxable depends on your total income and marital status.

Generally, if Social Security benefits were your only income for 2010, your benefits are not taxable and you probably do not need to file a federal income tax return.

If you received income from other sources, your benefits will not be taxed unless your modified adjusted gross income is more than the base amount for your filing status.

Your taxable benefits and modified adjusted gross income are figured on a worksheet in the Form 1040A or Form 1040 Instruction booklet.

You can do the following quick computation to determine whether some of your benefits may be taxable:

• First, add one-half of the total Social Security benefits you received to all your other income, including any tax exempt interest and other exclusions from income.
• Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.

The 2010 base amounts are:

• $32,000 for married couples filing jointly.
• $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouses at any time during the year.
• $0 for married persons filing separately who lived together during the year.

For additional information on the taxability of Social Security benefits, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits. Publication 915 is available on this website or by calling 800-TAX-FORM (800-829-3676).