Millions rely on Social Security, but many don't realize it can be taxable until after they retire. Many believe that paying taxes on Social Security benefits that were themselves funded by payroll taxes is unfair.
Source: Phillip Ingham, Flickr.
In this installment of our Social Security Q&A series, Dan Caplinger, The Motley Fool's director of investment planning, answers a question from Donald, who notes that he has a real problem with how Social Security gets taxed and wants to know why he pays what he sees as double tax. Dan notes that although most people think of their benefits as being funded by the Social Security payroll taxes they pay during their careers, the government doesn't see it that way, with court cases holding that there's no property right to Social Security benefits just because you pay payroll taxes. As a result, the IRS can impose tax on those benefits as completely separate income, with as much as 85% of your benefits being added to your taxable income and taxed at your ordinary income tax rate. Dan concludes that those taxes might not be fair, but Congress would have to change the tax laws in order to stop those benefits from being taxed.
Have general questions about Social Security? Email them to [email protected], and they might be the subject of a future video!
