Should Social Security benefits be taxed? [View all]

[BlueCheese]

In spending some holiday time with family this year, I found out that Social Security benefits can be subject to income tax. This came as a bit of a surprise to me, though maybe it shouldn't have been. I'd always thought it was like tax refunds-- it would be strange for the government to tax payments it's making to you.

Nor do you have to make a lot of money to start paying taxes-- taxes start at $25,000 for individuals and $32,000 for joint filers. At least you don't having to pay Social Security taxes on your Social Security benefits, so there's that.

From the SSA web site:

Some people have to pay federal income taxes on their Social Security benefits. This usually happens only if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to your benefits.

No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules. If you:

file a federal tax return as an "individual" and your combined income* is
between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
more than $34,000, up to 85 percent of your benefits may be taxable.

file a joint return, and you and your spouse have a combined income* that is
between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits
more than $44,000, up to 85 percent of your benefits may be taxable.