Like most seniors in the United States, Joe and Jill Biden both receive Social Security retirement benefits. In fact, the Bidens' tax return for 2019 shows the program provided the couple with $52,595 in benefits, up slightly from 2018 when they collected $49,545.
But the Bidens' tax returns for those two years do more than just show how much the couple collected. They also reveal three fascinating facts about how Social Security works -- and how it could change if the former vice president and Democratic presidential nominee wins the country's highest executive office after November.
1. Earning millions won't necessarily lead to huge Social Security benefits
For decades, Joe and Jill Biden have earned more than $200,000 annually and in recent years, the couple has reported millions in yearly income.
Since Social Security benefits are based on average wages during your 35 highest-earning years, you may assume the Bidens would receive a hefty retirement benefit. But while the couple gets more than the average -- which was just $1,517 per retiree per month as of August 2020 -- their Social Security checks aren't nearly as impressive as you'd expect. There's a simple reason for that. The Bidens, like other high earners, don't pay taxes on all their income and don't receive benefits based on total wages earned.
Instead, a "wage base limit" applies. For 2020, it's $137,700, but it changes from year to year. In any year when you earn above the wage base limit, Social Security taxes are capped and you're only given credit for income up to the limit. Those who earn up to the wage-base limit or more every year during their 35 highest-earning years receive the maximum allowable Social Security benefit, but no more.
If Joe Biden becomes president, his plan to shore up Social Security involves subjecting some income above that wage base limit to payroll taxes -- but not providing a corresponding increase in benefits. This would change the nature of Social Security, which has always been an earned benefit, as some Americans (those who earn $400,000 or higher) would be paying more money into the system but not seeing an increase in their Social Security retirement benefit.
2. Not everyone pays Social Security taxes on all their income
Most Americans pay Social Security payroll taxes on all their earnings, but not everyone does. The wage base limit is one reason why, but there's also another important reason: Not all income is taxed, as the Bidens' return helps illustrate.
Social Security taxes are collected on W-2 income from employers, as well as on self-employment income. But the Bidens were able to shield some of their earnings from payroll taxes by forming an S corporation and classifying them as distributions from the business, rather than as salary.
Because this process is relatively easy, many higher earners are likely to adopt the same technique to shield their income from the extra Social Security taxes Mr. Biden has proposed for those with incomes of $400,000 or above.
3. Some Americans are taxed on Social Security benefits
The last key thing to note about Social Security is that the Bidens were taxed on the bulk of their benefits. In fact, in 2019, they paid tax on $44,706 of the $52,595 in benefits they received. They aren't alone in owing these taxes, as up to 50% of retirees lose some of their Social Security monies to the IRS.
Although many retirees pay no tax on the Social Security benefits they receive, those whose "provisional income" exceeds $25,000 for single tax filers or $32,000 for married joint filers are taxed on some of their benefits. Provisional income is half of Social Security benefits, all taxable income, and some non-taxable income.
Of course, it's not just very high earners like the former vice president and his wife who owe tax on up to 85% of their benefits -- this is going to happen to a growing number of Americans because the $25,000 and $32,000 thresholds aren't indexed to inflation. Biden isn't likely to change these thresholds, which have never been altered since they were put in place, so as wages and benefits rise over time, more workers will have to pay.