Will My Social Security Benefits Be Taxed?

By: Jack Strulowitz

Whether you’re collecting Social Security already or you’re getting ready to file, this is probably a question you’ve wondered about and never gotten a straight answer to. Here’s the straight answer: for a lot of people, yes, your benefits are taxable. But the reason behind it might surprise you.

When Social Security began in 1935 under President Roosevelt, benefits weren’t taxed at all. That was the rule for 48 years, until the high unemployment and inflation of the late 1970s and early 1980s pushed Social Security within months of not being able to pay full benefits. The Reagan administration, along with Alan Greenspan, stepped in to keep the program afloat. Their recommendations became the Social Security Amendments of 1983, which set a rule aimed only at the highest earning retirees: once a married couple filing jointly earned over $32,000 a year, comfortably above what most retirees lived on at the time, up to 50 percent of their Social Security benefits became taxable. A decade later, in 1993, Congress added a second threshold of $44,000, above which up to 85 percent of a retiree’s benefit became taxable.

But here’s the catch. The law hasn’t been changed since. $32,000 and $44,000 are still the numbers today. Although a dollar in 1983 buys about thirty cents worth of anything today, the law still treats $32,000 as high income, exactly as it did back then. If that $32,000 threshold had simply risen with the same inflation that raised your grocery bill, it would be somewhere north of $106,000 today. Instead, it stayed frozen while benefit amounts, account balances, and the cost of living kept climbing.

That leaves an obvious question. Why has Congress left this number untouched through four decades of inflation? The honest answer is that Social Security needs the money. The program has been paying out more in benefits than it takes in for years now, and it’s been covering that gap by drawing on its savings reserves. Those savings are now projected to run out by the end of 2032, at which point benefits would face an automatic cut unless Congress acts before then. Leaving that threshold frozen has been a quiet way to keep more revenue flowing toward that problem, year after year, without a single politician ever having to cast a vote that looks like a tax increase.

There is a genuine bright spot in all of this. A new federal law gives retirees 65 and older an extra deduction of $6,000 per person through 2028, real relief for a lot of households. It doesn’t touch the frozen thresholds themselves, but it can soften the bill for plenty of people right now.

So back to the original question. Will your Social Security be taxed? In many cases, yes, and it doesn’t take a high income to get there. Take a married couple where each spouse collects the average Social Security benefit, currently around $2,071 a month, or roughly $49,700 combined for the year (Source: SSA). Half of that alone is about $24,850. Add a modest pension of $10,000 a year and a $5,000 IRA withdrawal, hardly an extravagant retirement, and that couple’s combined figure comes to nearly $40,000. That’s well past the $32,000 line, meaning half of their Social Security benefit is already taxable, even though nothing about their income looks unusual for a retired couple.

Those numbers are more within your control than most people assume. The years right after you stop working, before benefits actually start, tend to be the best window to do something about it, since income is often at its lowest right then. That makes it a smart time to think carefully about how and when you draw from retirement accounts, including whether a Roth conversion makes sense, so that less income shows up in future years to push you across one of these frozen lines.

Nobody’s waiting on Congress to fix a forty-year-old formula. But nobody has to just accept whatever number falls out of it either. A real look at your specific situation, early enough to still act on it, is usually worth far more than people expect. n

Jack Strulowitz is a Financial Advisor at Bernath & Rosenberg in Cedarhurst, NY, where he helps high-net worth individuals and families manage their investments and build comprehensive strategies for retirement, tax, and estate planning. For questions or to schedule a consultation, please contact [email protected] or 847-962-3352.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Securities and advisory services offered through LPL Financial, a registered investment advisor, member FINRA/SIPC.