The Growing Impact of the ‘Stealth Tax’ on Social Security Retirees – ‘People’s jaws would fall to the ground’

Social Security payments are primarily calculated based on an individual’s contribution to the program through payroll taxes during their working years.

If a retiree’s overall income, including Social Security, surpasses a certain threshold, they may find themselves liable for personal income taxes on their benefits.

Financial experts note that due to annual cost-of-living adjustments (COLAs), an increasing number of Social Security beneficiaries are now subject to these “stealth” taxes on their benefits.

Even though Social Security benefits receive yearly adjustments to account for inflation through COLAs, the income tax thresholds for recipients have remained unchanged since the inception of taxing benefits in 1984.

Consequently, with each increase in benefits, a greater number of seniors become susceptible to income taxes on their Social Security payments.

This issue has become particularly pronounced in 2023 due to the significant 8.7% COLA – the most substantial increase in over four decades.

As reported by USA Today, every year a growing segment of the senior population surpasses these income thresholds and consequently is obligated to pay taxes on their Social Security benefits.

Jordan Gilberti, senior lead planner and certified financial planner at Facet, characterizes this as a “stealth tax.”

He notes, “Everyone knows Social Security gets taxed, but rarely do they see how it’s taxed. People’s jaws would fall to the ground.”

Others share a similar sentiment. In an interview with CNBC in April, David Freitag, a financial planning consultant and Social Security expert at MassMutual, also described it as a “stealth tax.”

As previously detailed by GOBankingRates, individuals whose provisional income exceeds $25,000 and joint filers with income surpassing $32,000 may be subject to taxes on up to 50% of their Social Security earnings.

For those with provisional income exceeding $34,000 as individuals or $44,000 for joint filers, up to 85% of their Social Security benefits could be taxable.

Due to the notably high COLAs in recent years, an increasing number of seniors find themselves subject to the 85% tax on their Social Security benefits.

However, had these income thresholds been adjusted to account for inflation over the years, the original $25,000 threshold would presently equate to approximately $73,000, as indicated by The Senior Citizens League, a nonpartisan advocacy group. Likewise, the $32,000 threshold for couples would now stand at around $93,200.

Critics argue that the tax regulations about Social Security create an unjust burden on older Americans who rely significantly on the program for their retirement income.

A survey conducted earlier this year by The Senior Citizens League revealed that 58% of older taxpayers desire an adjustment to the Social Security thresholds.

Mary Johnson, Social Security and Medicare policy analyst at The Senior Citizens League conveyed that, “This failure to adjust the income thresholds is negatively viewed by older taxpayers as a form of double taxation and even described as ‘ageist’ in the comments we receive.”

Addressing the issue has been a substantial challenge, mainly due to the exclusion of seniors from the decision-making process by U.S. lawmakers.

Johnson explained, “When they’re considering changes to Social Security and Medicare, they’ve never, ever turned to senior constituents or advocates as individuals to sit on commissions or in on negotiations. We’ve never been invited to the table.”

In nearly a dozen states, seniors may be liable for state taxes on their Social Security benefits in addition to federal taxes.

States that might tax a portion of these benefits include Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, and Vermont, according to USA Today.

For those seeking to reduce or eliminate taxes on their Social Security income, options are limited. One approach involves lowering provisional income, but this may not be feasible if that income is necessary for covering living expenses and sustaining one’s lifestyle.

Another strategy is converting a 401(k) or traditional IRA into a Roth IRA. Distributions from Roth IRAs do not count as provisional income. However, tax is incurred during the conversion.

Jordan Gilberti advised, “We also recommend doing those Roth conversions, if you can, by 63 [years old], because your Medicare premium, which will be taken out of your Social Security check, depends on your income from the last two years.”