No one wants to pay any more tax than they have to. For those who rely on Social Security for help making ends meet, every penny of their benefits is important. That's why so many people are shocked to learn that under some circumstances, their Social Security benefits can be subject to income tax -- effectively forcing them to give back from their precious monthly checks.
Many people have looked forward to the tax reform efforts that took effect at the beginning of 2018 as a possible way to fix some of their perceived problems with the tax system. Unfortunately, tax reform didn't have a direct effect on the taxation of Social Security, and even the parts of the legislation that affected Social Security taxation directly won't have as big of a positive impact as many might hope.
Why retirees had to pay tax on Social Security in the first place
Social Security wasn't treated as taxable income until the early 1980s, when another reform effort changed the rules on taxation of benefits. Because Social Security was running into financial trouble, lawmakers agreed to look at ways to raise revenue in order to help pay for the program.
The decision that Washington eventually made was to create a test based on income, so that only some of those getting Social Security benefits would end up having to pay extra income tax. How the test works is that you take your total income from most sources other than Social Security and then add in 50% of your benefits for the year. So if you're still working, then your job income gets considered, and those with investments have to include their interest and dividends in the mix. Pension income also gets included if you're fortunate enough to receive payments from an employer.
Many people have looked forward to the tax reform efforts that took effect at the beginning of 2018 as a possible way to fix some of their perceived problems with the tax system. Unfortunately, tax reform didn't have a direct effect on the taxation of Social Security, and even the parts of the legislation that affected Social Security taxation directly won't have as big of a positive impact as many might hope.
Why retirees had to pay tax on Social Security in the first place
Social Security wasn't treated as taxable income until the early 1980s, when another reform effort changed the rules on taxation of benefits. Because Social Security was running into financial trouble, lawmakers agreed to look at ways to raise revenue in order to help pay for the program.
The decision that Washington eventually made was to create a test based on income, so that only some of those getting Social Security benefits would end up having to pay extra income tax. How the test works is that you take your total income from most sources other than Social Security and then add in 50% of your benefits for the year. So if you're still working, then your job income gets considered, and those with investments have to include their interest and dividends in the mix. Pension income also gets included if you're fortunate enough to receive payments from an employer.
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