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What Do You Mean, There Could Be a Tax on Social Security?

I was a Registered Tax Return Preparer (RTRP) and a partner in 3 national brand tax preparation stores in Pennsylvania for over 10 years.

By Social Security Administration [Public domain], via Wikimedia Commons

By Social Security Administration [Public domain], via Wikimedia Commons

Retires Can Actually Have to Pay Income Tax on Social Security Benefits

As a tax preparer, I have had more than one taxpayer express surprise (outrage?) over the fact that their social security income would actually be taxable. A married couple, both over age 62 and collecting social security benefits, who, in addition to some interest income and a small pension, continued to both work part-time. Despite having tax taken out of their paychecks and the pension, with the inclusion of part of their social security benefit as taxable income, they owed over $1000!

Most retired people believe that their social security benefit is tax-free. For the most part, and for many retirees, this is true, especially when social security is their only source of income. These retirees may not even have to file a tax return. Supplemental security income payments (SSI) are not taxable.

But, add a pension or an IRA distribution, combine it with some taxable or even tax-free interest, and mix in some dividends, capital gains, or earned income; then, depending on your filing status, your social security benefit may become taxable.

The amount of your social security benefit that is taxable depends on your total income and filing status. Up to 85% of your social security benefit may be included as taxable income on your income tax return. Not only may it be taxable, it could even push you into a higher tax bracket!

To Estimate if Some of Your Social Security Benefit May Be Taxable:

1. Add together all of your income, including earned income, distributions from pensions, 401(k)s, IRAs, taxable and tax-exempt interest, dividends, capital gains, and also include items usually excluded from income such as interest on savings bonds or foreign earned income.

2. To the total from #1, add 1/2 of the total social security benefit you (and your spouse if filing jointly) received (as reported on a form SSA-1099). This is your "combined income."

3. If you file as an individual and your combined income is

a. between $25,000 and $34,000: You may owe federal income tax on up to 50% of your benefit.

b. over $34,000: Up to 85% of your benefit may be taxable.

4. If you file MFJ (married filing jointly) and your combined income with your spouse is

a. between $32,000 and $44,000: Up to 50% of your benefit may be taxable.

b. Over $44,000: Up to 85% of your benefit may be taxable.

Save Yourself a Tax Bill at Tax Time

If you owe tax on a portion of your social security benefit, you can save yourself a tax bill at tax time. In addition to having tax withheld from your paycheck, pension or IRA distribution, you can have tax withheld from your social security benefit. Complete a Form W-4V Voluntary Withholding Request and file it with the Social Security Administration.

For more information, see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.

Tax diversification can reduce your tax liability in retirement and potentially decrease the portion of your social security benefit subject to income tax.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2012 Mark Shulkosky


Mark Shulkosky (author) from Pennsylvania on February 03, 2013:

ib, I agree. Middle class wage earners can't get that rich because they have to pay their taxes as they go along and can't take advantage of that many loop holes in the tax code. The real wealthy earn their wealth outside the tax code (Gates, Ellison, Buffet, etc.). They have paper wealth that they control how they harvest it to control their tax bills.

Talk again after the tax season.

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Brad Masters from Southern California on February 03, 2013:

Banks Cottage

My point was that the tax even from the sale of stocks would make it difficult to make a billion, even if your stock was worth a billion.

As for those with stock that became billionaires, Bill Gates and his partner, Paul Allen, Larry Ellison of Oracle.

In addition, many billionaires are asset billionaires and not liquid billionaires, so they don't pay taxes until they exercise their assets.

My ultimate question is with the current federal tax system how can any wage earner become rich, without utilizing the many loopholes of the IRC. The upper middle class wage earner most likely is only a few steps from the wave of credit breaking over there head, rendering them in the red.

Then there are those loophole billionaires that can buy several high price homes across the country, and the world. They can afford private yachts, private jets and rent entire floors of five star hotels.

The federal and state income taxes doesn't slow them down, but for the middle class wage earner it is like an anchor dragging them down.


As you said, it is tax season, my father in-law was a CPA and he did taxes into his early 80s, and died at 91. So I understand the tax crunch.

We can have more discussions in May.

Mark Shulkosky (author) from Pennsylvania on February 03, 2013:

Hi Pamela, glad you found the information useful. Tax season is cranking up. Hope you and your family also have a great new year.

Mark Shulkosky (author) from Pennsylvania on February 03, 2013:

ib, I don't think it would be very easy for a person to become a billionaire by just investing in stock unless you owned enough of the stock to essentially own the company. Basically, you start the company and therefore have a lot of stock before it goes public and even then still have a large share of it. The Walton family (Wal-Mart) are billionaires, but their family started the company.

I don't think many, if any, people could just earn enough to become a billionaire, even with taking every possible advantage in the IRC. Al Gore may do it, but not by just earning money. If he does it, it will be by owning, investing, buying and selling businesses. He made $100 million before capital gains taxes by selling his t.v. station. Phil Michelson may earn $60 million a year with golf and endorsements etc, but without investments, (stocks, businesses, golf courses, etc), I don't think he could do it. Hedge fund managers, private bankers, basically the really big guys on Wall Street could do it, but the question becomes did they make this money by earning it, by running a business, or by investing. Not that they don't work, I don't think many of us would think of them as 'wage earners' (I make $50,000 per hour ????).

So, I think it would be very hard, if not impossible to earn your way to a billion dollars. So, how could some one become a billionaire?

The 'easiest' way would be to invent or create something, go into business, have it go public and have your ownership stake (your stock) become very valuable or sell the business and make a profit on the sale.

In the industrial revolution, Carnegie, Westinghouse, etc. had businesses that made traditional products (steel, light bulbs, etc.). They made a lot of money off of the backs and hard work of their workers. Michael Dell, Bill Gates, Steve Jobs, took ideas, technology and made their products available and affordable to the masses, improved productivity and made a lot of money along the way. Now, Google, Facebook, etc., take ideas, technology and services and their founders have made billions when their companies went public. Come up with the next great idea, bring it to market, make it successful and you could become a billionaire.

There are also the riskier, illegal ways to become a billionaire (think drug cartels). Probably not the easiest businesses to break into.

To some degree, you could argue that it would be hard, if not impossible, to make $1 billion without the aid of the efforts of other people (employees, stock in companies and their employees, etc.)

Finally, you could become a billionaire the old fashioned way. You could inherit the money ;-)

Pamela Dapples from Arizona. on February 02, 2013:

You've sure given us a lot of good information here, bankscottage. I'm glad I bumped into this hub because I had a question in my mind about an aspect of this, just by coincidence.

I can imagine you're very busy right now during tax season. Best wishes to you and your wife for a happy and peaceful spring (after tax time.)

Brad Masters from Southern California on February 02, 2013:


You got that right, and if it wasn't for the mild weather this state would probably be a lot better politically.

Another question,

Inquisitive minds want to know, well maybe just me.

Under the current tax system, both Federal and state, especially CA, how would anyone be able to become a billionaire.

For example, lets start high.

A CEO who gets a straight salary of ten million dollars a year, and no bonus and no stock options.

With this profile, I can't see this person becoming a billionaire ever.

Now take ex president Bill Clinton with a pension of $200,000 a year, and book deals and spesking engagementsm, yet since he left office bankrupt, he and Hillary have amassed a fortune of over 100 million dollars. Now he didn't do this feat with.out massaging the IRC

Now most of the billionaires did it throught the stock market, especially during the dot com bubble, but what are the chances of doing it without the stock market?

Anyway, I thought this question might be interesting to solve, or at least try to solve.

Have a great weekend

Mark Shulkosky (author) from Pennsylvania on February 02, 2013:

Oh, oh ib. I live in a flat tax state and you live in a fat tax state ;-)

Brad Masters from Southern California on February 01, 2013:


Thanks for the reply.

I agree with the examples that you gave here, and I living in CA, I really like the PA flat tax.

Mark Shulkosky (author) from Pennsylvania on February 01, 2013:

ib, the IRC is so complicated because politicians pander to special interest groups of all income levels. Little sections of the code apply to certain taxpayers and nobody else for any number of reasons.

Certainly the highest income earners have the most resources to take advantage of every nuance of the code.

For instance, very low income people get earned income credits, additional child tax credits, etc. I have taxpayers in my office that make $9 -15K and can get refunds of $6 to 9K if they have 3 kids. I can assure you that these taxpayers know the few, but significant, rules that apply to them and allow them to get significant refunds.

My feeling would be that those in the middle have ways in the law to decrease their tax liability, but for any number of reasons, they can't use the "rules" set up to their advantage. Education credits don't help if you or your kid aren't in college. Educator expense credit only helps if you are a teacher. Deducting mortgage interest and real estate taxes only if you own a home (and the deductions exceed the standard deduction). No new solar panals, no energy credit. And on and on.

The Pennsylvania state income tax is a flat rate, 3.07% regardless of your income or how you earn it. There is tax forgiveness for low income taxpayers and it depends on the taxpayer's income and number of dependents (these tax payers get the tax they paid refunded back to them). At the present time, social security and retirement income are not taxed in PA helping retirees. The only deductions allowed are for items necessary for you to do your job such as work boots, tools, professional license, continuing education, union dues, etc. It seems to be a very simple and fair system. It is possible, Washington just has to have the will to do it.

Thanks for your comments and insight.

Brad Masters from Southern California on February 01, 2013:


I understand the difficulty, I was interested specifically for the wage earner that works as aW2 for an employer.

This is the class of wage earners that have lost most of their deductions because of the 1986 Tax Reform Act.

My point of asking the question was to try to quantify my opinion that the bulk of the IRC is not usable by the average employed wage earner.

Of course when you are self employed, you get access to Schedule C business deductions. But at the same time you are really a one person business that has to pay FICA contributions as an employer as well as the employee.

My opinion is the the billionaires or the 1% people are not the simple wage earner, or even the self employed wage earner. While the marginal tax at high six figures and above is the highest, these tax payers have hundreds, or even thousands of ways to reduce, defer, and even eliminate their tax liability.

It is a product of their wealth and higher earnings that enable them to use more of the IRC than the rest of the people.

I don't think that it is an accident that the IRC is so complicated, this makes it difficult to follow and very expensive tax attorneys can ride that trail to save their clients enough money to make their expensive billing trivial in comparison to the tax liability reduction.

This is not an indictment, it is just an observation.


Mark Shulkosky (author) from Pennsylvania on February 01, 2013:

ib, I'm not sure that anyone can calculate what percentage of the IRC is used by a specific wage earner or wage earners in general. The code is so complicated. Some wage earners use certain parts that other wage earners wouldn't. For instance, the credit for Educator Expenses would only apply to teachers, while certain other areas apply more to truck drivers, etc. Publication 17 is the framework for individual tax payers and there are several supplimental publications for related forms. I wouldn't have any idea what percentage of the tax code applies to wage earners in general. This section of the code is for individual taxpayers. It includes all of the ways you can earn your money, wages, self-employment, passive income, etc.

Brad Masters from Southern California on January 31, 2013:


Here is an interesting question.

What percentage of the IRC can be used by a wage earner?

Total income is from wages, and use the max SS as the top of the wages.


Mark Shulkosky (author) from Pennsylvania on January 31, 2013:

ib, thanks for the comment and suggestions. Everyone's taxes are unique but a few examples could be very helpful. That would also lead into another Hub I have been meaning to write about tax diversifying your portfolio. Thanks again.

Brad Masters from Southern California on January 31, 2013:


I would think that some specific examples would make the SS tax more clear.

Maybe 3 examples showing No Tax, Average Tax, and Maximum Tax based on SS benefits.


Sondra Rochelle from USA on January 26, 2013:

I knew that SS could be at least partially taxable, but it's good that you explained it in this hub. When are people going to learn that there is no free lunch! Nicely done and voted up!

Mark Shulkosky (author) from Pennsylvania on April 09, 2012:

tamarawhilhite, thanks for stopping by and asking a question. While social security benefits may be taxable, supplemental security income (SSI) that a disabled person could receive are not taxable. SSI is administered through the Social Security Administration, so some times it is hard for people to tell them apart.

As far as what percentage of retired people pay tax on social security, that is a good question. I don't know if anyone keeps track of that statistic. The clients in my tax office tend to be lower income, and my relatives that are on social security do not have large pensions, so most or all of them do not pay taxes on social security. Since many retirees live almost exclusively on social security, my guess would be that the percentage is most likely less than 30%. But, I am not sure. It does seem harsh that if you worked hard, saved, and paid social security tax all of your working career, that you would be punished by having to pay taxes on a social security benefit you receive in retirement (when you paid tax on the money you contributed).

Tamara Wilhite from Fort Worth, Texas on April 08, 2012:

What percentage of the retired or disabled pay income taxes on their Social Security benefits?

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