The general population may be surprised to learn senior citizens are required to pay federal income tax on Social Security benefits they receive. This year about half of all senior citizens receiving Social Security benefits will be required to pay some federal income tax based on a procedure weighing “combined income”against a “threshold” dollar amount and personal status.
For example, a widow (individual) with a “combined income” between $25,000 and $34,000 (threshold) may have to pay tax on up to 50% of her Social Security benefits. If her “combined income” is more than $34,000, up to 85% of her benefits may be taxable.
If these “threshold” amounts seem unreasonably low, it’s because they were set by Congress about 30 years ago and never indexed or adjusted for inflation; a threshold level meant to require 10% of benefit recipients to pay tax now ensnares about 50%.
Our widow’s “combined income” is defined as her adjusted gross income (AGI) plus nontaxable interest plus half of her Social Security benefits. Imagine if she is receiving half of her late husband’s private pension and Social Security benefits plus working a minimum-wage job. Her “combined income” would easily exceed $34,000 and make up to 85% of her Social Security benefits taxable.
After 30 years of inaction, the thresholds are long overdue for upward revision; this period of extreme inflation makes revision even more urgent. The thresholds were originally set by Congress using a mix of politics, existing private pension tax law and social engineering. Congress avoids career-limiting tinkering with Social Security, preferring to offload the headache to a council or committee.
Regardless, in this election year Congress must answer to the senior citizen voting bloc and increase the threshold amounts.