Benefits Tax Pushes Some Seniors' Marginal Tax Rate Over 100 Percent, Says NCPA Report

DALLAS (August 14, 2000) – Since 1993, middle-income Social Security recipients have been subject to income tax on up to 85 percent of their benefits. According to a new report released by the National Center for Policy Analysis (NCPA), this "benefits tax" can result in a marginal tax rate in excess of 100 percent for middle-income seniors.

"Many senior citizens face a higher marginal rate than Bill Gates," said NCPA Senior Scholar Dorman Cordell.

The Social Security benefits tax is imposed on up to half of benefits for single retirees with an income between $25,000 and $34,000 and between $32,000 and $44,000 for couples. This means seniors must add 50 cents in benefits to taxable income for every additional dollar they earn until half of their benefits become subject to tax. This means:

  • When the elderly earn a dollar, they have to pay taxes on $1.50.
  • As a result, seniors who are in the 15 percent tax bracket face a marginal tax rate of 22.5 percent.
  • Seniors in the 28 percent tax bracket face a marginal rate of 42 percent.

Single retirees with income over $34,000 and couples with income over $44,000, must add 85 cents in benefits to taxable income for each additional dollar of their income. This means they face marginal tax rates of 28 percent (15 percent bracket) and 52 percent (28 percent bracket).

  • Because of the Social Security benefits tax, a beneficiary in the 28 percent income tax bracket faces a marginal tax rate of 52 percent on withdrawals from pensions and IRAs and 44 percent on capital gains.
  • The benefits tax even causes tax-exempt income to be taxed at a 24 percent marginal rate.

The earnings penalty, which was recently eliminated for seniors over age 65 but is still in effect for Social Security beneficiaries age 62 to 64, takes away a dollar in Social Security benefits for every two dollars of wages. Those wages are also subject to the FICA payroll tax. Thus:

  • A 64-year-old married beneficiary with income of $32,000, including $10,800 of wage earnings, must pay 83 cents in taxes on each additional dollar of wage income.
  • If the same beneficiary's income rises to $44,000, the couple must pay $1.09 in taxes on each additional dollar of wage income.

"The government gives with one hand and takes away with the other," said Cordell.

The House has voted to roll the benefits tax back to the 50 percent level that was in place before 1993. The Senate is expected to vote on the House bill later this year.