Why Are Social Security Benefits Taxed?

We get asked this question a lot: “Why are Social Security benefits taxed?”

It’s perplexing to many people that the government would give them a benefit designed to help them financially, and then, tax that benefit, which is definitely not a help to them financially.

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Money, money, money

It does seem counter-intuitive, doesn’t it?

Well, it is a fairly recent development. Social Security benefits were not taxed until 1983, during the Reagan Administration. A second level of taxation was added during the Clinton Administration in 1993.

Original forecasts stated that only 10% of all Social Security recipients would be taxed. However, the income thresholds have never been updated since 1983, and therefore approximately 56% of all senior households now have to pay tax on their Social Security benefits. Additionally, some states also tax Social Security benefits. Yikes!

Is there any chance these taxes will go away in the future? The chances, unfortunately, are just about zero. Social Security really needs the income generated by the taxes. Unless there is some radical restructuring (unlikely in today’s political climate) that significantly increases Social Security funding, the taxes are here to stay.

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