How much of your social security benefits are taxed?

For those receiving Social Security Benefits, or those who plan to in the future, you might think that you’ve already paid taxes on the income you receive from your retirement fund as you built it up over the years. However, the way the program is structured you only put in about 15 percent of the money you get out.

The rest comes from what your employer put in and the interest earned by the Trust Funds. This means that depending on how much income you have in addition to your benefits when you retire you may have to pay federal and even state taxes on your Social Security Benefits.

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Why are Social Security Benefits taxed?

Your Social Security fund is financed through a dedicated payroll tax that both the employee and the employer pay into. In 2021, each party pays in 6.2 percent of wages up to the current maximum taxable amount of $142,800 in earnings, the self-employed pay 12.4 percent of their maximum taxable earnings. That accounts for roughly 90 percent of the Old-Age and Survivors Insurance and Disability Insurance (OASDI) benefits fund revenue. The remainder comes from interest and revenue from the OASDI benefits fund.

Because the beneficiary only pays one part of the amount they receive upon retirement, roughly 15 percent, and due to the short-term financing crisis that Social Security faced in the early 1980s legislation was passed to tax Social Security Benefits in 1983. However, limits were imposed to protect lower-income individuals through thresholds for when benefits could be taxed.

When do you have to pay taxes on Social Security Benefits?

The majority of beneficiaries do not pay taxes on their Social Security Benefits, but around 40 percent currently do according to the Social Security Administration. That is up from a little over 18 percent in 1993, the last time the taxation rules were adjusted. When the thresholds were initially set for taxing Social Security Benefits they were intentionally not indexed to inflation, meaning they would lose some of their effect over time. Still, Social Security benefits currently enjoy more favorable taxation provisions than income from private pensions.

Under current tax law, those with a combined income over $34,000 for individual filers and $44,000 for joint filers will pay tax on up to 85 percent of their benefits. Those with a combined income of less than $25,000 for single filers and $34,000 joint filers will not have a tax liability on their benefits. For those in between the two thresholds they will pay tax on 50 percent of their benefits.

Social Security beneficiaries cross the income thresholds usually when they have other substantial income, be that from work, interest, dividends on investments or other taxable income.