The fact that Social Security can be taxed, starts the debate about double taxation. We pay payroll tax that funds the Social Security Trust, which delivers our benefits, and then we pay taxes on those benefits. To many, this is a clear example of double taxation; however, Sean Williams, reporting for The Motley Fool, argues that it isn’t that simple.
The way Social Security can be taxed is not a perfect system, but it’s not double taxation. It’s easy to get confused because we often pay taxes on our income and our benefits. In truth, you don’t get back the money you paid into the Social Security system. Your benefit is based off your income from 35 of your highest earning years; what you pay into the program goes towards funding the older generation’s Social Security. So, it is not double taxation because you’re not paying on the same amount you put into the program.
The Problem with Social Security Tax
The real problems lie with the fact that Social Security taxation has not adjusted for inflation. Congress, in 1984, had decided that Social Security can be taxed if you received income higher than a certain amount. Individuals making more than $25,000 a year, and couples making more than $32,000 a year, will have their benefits taxed. Those numbers reflect the medium income of the ’80s, whereas the medium income in 2022 is around $80,000 per year.
Additionally, tax laws can vary state-to-state; depending on the state, if you make enough to be taxed, you could be hit with federal taxation as well. Now that’s true double taxation! Social Security beneficiaries may have certain tax exemption in one state and may not in another.
The tax on benefits is likely to remain, but we can demand that it change with the times. The Council for Retirement Security is demanding Congress prioritize Social Security protection, so we can rely on our benefits when we need them.