When calculating individual benefits, the Social Security Administration draws on up to 35 years of personal earnings history. To receive Social Security benefits in the first place, you have to work at least 10 years. Therefore, it’s not that surprising that many people see their benefits as something they have earned.
Yet each year, Uncle Sam collects a share of people’s benefits through income taxes. You may have to pay taxes on as much as 50%-85% of your benefits, depending on how much income you report to the IRS.
Why are Social Security Benefits Taxable?
Decades ago, Social Security benefits used to be tax-free. Then in 1984, the U.S. government had its first Social Security funding crisis. Congress passed legislation to shore up the program and made SS benefits taxable in certain cases. Up to 50% of benefits could be taxed, but later Congress upped it to as much as 85% of benefits, with some collected revenues going toward Medicare.
As you plan and prepare for retirement, it’s important to know whether your own benefits may be taxable.
