There is no doubt that this has been a challenging year for all Americans. The 2019 coronavirus disease pandemic (COVID-19) has completely disrupted social norms, left more than 20 million people unemployed, and caused a level of panic and uncertainty that had not been seen in a long time.
But amid the chaos, the country’s most famous social program, Social Security, remains a stone for nearly 65 million Americans, many of whom are senior citizens. The Social Security program has made its way through 13 previous recessions with great success and will undoubtedly also overcome the COVID-19 crisis.
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However, being the most successful social program does not mean that everyone necessarily has the relevant Social Security data. A number of common misconceptions have prevailed for decades, such as the (wrong) idea that Social Security would be bankrupt by the time future generations of workers retire or Congress has reached into the proverbial jar of Social Security cookies and stolen funds from American workers. .
However, there is a Social Security claim that has merit as fact and fiction: the idea that Social Security benefits can be taxed twice.
Is the tax on your Social Security benefits doubled?
The idea is that hard-working Americans pay the Social Security system through payroll tax before retirement, then, during retirement, they can receive a federal tax on the Social Security benefits they receive.
By context, the taxation of Social Security benefits applies when the modified adjusted gross income (MAGI) for a person or couple filing a joint return, plus half of the benefits received, exceeds $ 25,000 or $ 32,000, respectively . This initial level exposes up to half of the beneficiary’s Social Security benefits to ordinary federal tax rates.
There is a second tier for individuals and couples with a MAGI plus half of benefits over $ 34,000 and $ 44,000, respectively, where up to 85% of Social Security benefits can be taxed. The income thresholds at these two levels have never been adjusted for inflation, despite having been enacted in 1983 (the lower level) and 1993 (the upper level).
According to the non-partisan group on older people The Senior Citizens League, about half of all households of older people are exposed to taxes on their Social Security benefits each year, and this number is growing because income thresholds are not they are adjusted for inflation in decades.
Sounds like a nice double tax case, right? Well it is not.
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For starters, not everyone faces federal taxes during retirement. Although half of all nursing homes currently pay some type of tax bill each year on their benefits received, the other half will not owe a penny.
Also, the idea of double taxation depends on the idea that the money that Social Security collects each year is recurring in nature. While the 12.4% payroll tax on earned income and taxation of benefits are recurring, the $ 80.8 billion raised in 2019 as interest income on the $ 2.9 trillion in program asset reserves are not recurring . In simple terms, you are not taxed on the same dollar that you paid in the system, with about 8% of the annual program income derived from interest paid by the government.
In this sense, the double taxation of Social Security benefits is considered a myth.
In these 13 states, double taxation of Social Security benefits can become a reality.
As I said before, the idea that Social Security benefits can be doubly taxed is a fact. This misconception comes true if you live in one of the 13 states that also tax Social Security income to some varying degree. These states are (in alphabetical order):
- Colorado
- Connecticut
- Kansas
- Minnesota
- Missouri
- Montana
- Nebraska
- New Mexico
- North Dakota
- Rhode Island
- Utah
- Vermont
- West Virginia
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If a Social Security beneficiary earns enough to pay statewide taxes, they will also be subject to federal taxes in these 13 states. That’s the same dollar hit with two separate income taxes, which is the precise definition of double taxation.
On the other hand, the taxation of benefits at the state level can vary enormously. As an example, despite being a tax status, Missouri offers some pretty generous exemptions to Social Security beneficiaries. Taxation of benefits does not take effect until $ 85,000 for single taxpayers and $ 100,000 for couples filing a joint return. Similar generous exemptions can be found in Rhode Island, Connecticut, and even Kansas.
At the other end of the spectrum are states like Minnesota, North Dakota, Vermont, and West Virginia. As recently as a couple of years ago, all four states reflected the federal tax schedule for Social Security benefits. Since then, however, all four have updated their income thresholds and become much more forgiving by taxing Social Security income. Still, there is a much greater chance of being doubly taxed in these four states than in Missouri, for example.
Ultimately, the reality of Social Security double taxation depends on how much you earn and where you live.
