Should We Still Be Taxing Social Security Benefits? Here’s What You Need to Know

Did you know that Social Security benefits were completely tax-free for nearly 50 years? From the program’s beginning in 1935 until 1983, retirees didn’t pay federal income taxes on their Social Security income. That changed with a pivotal decision by Congress, influenced by the Greenspan Commission, and signed into law under President Ronald Reagan.

Let’s explore why that change happened, how Social Security benefits are taxed today, and what it could mean for retirees if the tax were eliminated.

How Social Security Became Taxable in the First Place

In 1983, the Social Security Act was amended to introduce federal income tax on Social Security benefits. This change was recommended by the Greenspan Commission, which was tasked with addressing a looming funding crisis in the Social Security trust fund.

The logic behind the decision was twofold. First, other types of retirement income—like private pensions—were already being taxed, so this was seen as a move toward fairness. Second, the Commission found that many retirees were receiving more in benefits than they had contributed during their working years. With life expectancy increasing, the system needed new ways to remain solvent.

Who Pays Taxes on Social Security Benefits?

Not everyone pays taxes on their Social Security income, but more people are being affected each year. The determining factor is something called “provisional income,” which is calculated by adding:

• Adjusted Gross Income (AGI)
• Tax-exempt interest
• 50% of your Social Security benefits

This combined total is used to determine whether your benefits are taxable.

When the tax was first introduced in 1983, the thresholds were:

• Single filers with provisional income under $25,000 paid no tax
• Married couples filing jointly with income under $32,000 paid no tax
• Above those amounts, up to 50% of benefits could be taxed

In 1993, a second tier was added through the Omnibus Budget Reconciliation Act:

• Single filers with provisional income above $34,000
• Married couples above $44,000
• Now up to 85% of benefits could be taxed

These thresholds have never been adjusted for inflation, so more retirees are being pushed into paying taxes on their benefits even though their real purchasing power may not have increased.

Real-World Examples: How Much Tax Are We Talking About?

Let’s break down how this plays out for different types of retirees.

Example 1: A married couple with $30,000 in AGI and $24,000 in Social Security benefits has a provisional income of $42,000. That puts them in the range where 50% of their Social Security income—$12,000—is taxable. At a 12% tax rate, that’s $1,440 in taxes. If Social Security income weren’t taxed, they would save that amount and might even drop into a lower tax bracket.

Example 2: Another married couple earns $90,000 in AGI, including $60,000 from the wife’s income, plus $24,000 in Social Security. Their provisional income is $102,000, which means 85% of their benefits—$20,400—are taxable. At a 22% tax rate, they pay $4,480 in taxes on their benefits. Eliminating the tax could save them that full amount.

Example 3: A single filer has $12,000 in AGI from a private pension and receives $24,000 in Social Security. Their provisional income is $24,000, which is below the $25,000 threshold, so none of their benefits are taxed. In this case, abolishing the tax would have no effect.

What Would Happen If Social Security Benefits Weren’t Taxed Anymore?

Eliminating the tax would significantly benefit many retirees, especially those in higher tax brackets. Not only would they keep more of their income, but they could also be bumped into a lower tax bracket, reducing their overall liability.

However, this change would come at a cost to the Social Security trust fund, which currently benefits from the revenue generated by taxing Social Security benefits. To offset that loss, lawmakers would need to find new ways to fund the program—possibly by raising the wage cap, adjusting benefits, or introducing new taxes elsewhere.

What About Medicare?

While Social Security gets most of the attention, Medicare is just as important and often just as confusing. The right Medicare decisions can save retirees thousands of dollars, while the wrong ones can result in penalties and coverage gaps.

If you’re unsure about your eligibility or which plan is right for you, consider taking a Medicare quiz or consulting a specialist to avoid costly mistakes.

Want More Like This?

If this kind of breakdown is helpful, check out our Medicare School series where we simplify retirement topics like Social Security, Medicare, and financial planning. Whether you prefer to read or watch, we make it easy to stay informed and confident in your decisions.