In 2018, Presidential Nominee Joe Biden and his wife Jill declared $49,545 in income from Social Security on their tax return. Their returns also showed they were taxed on $42,113 of those benefits.
For those not familiar with the rules for when and how Social Security benefits are taxed, it may come as a shock the Bidens would be paying the IRS back a portion of the benefits they received from the government. Even more surprisingly, they aren't the only ones in this situation.
Here's why the Bidens paid federal tax on Social Security
While Social Security benefits originally weren't subject to federal tax, reforms in 1983 and 1993 changed the rules so some revenue was collected on the benefits of high earners. Specifically, up to 85% of benefits become taxable once your income exceeds a certain threshold, which explains why the Bidens paid tax on $42,113 of the $49,545 they received.
The Bidens, with an adjusted gross income topping $4.5 million in 2018, definitely count as high earners. But it's not just Social Security beneficiaries with incomes in the millions who end up owing money to the IRS. In fact, around 50% of retirees now owe taxes on some of their benefits, compared to around 10% when the taxes were first introduced.
Such a large number of retirees are taxed on their benefits because they can have just $25,000 in countable income as single filers or $32,000 as married joint filers before owing tax on up to 50% of benefits. And up to 85% of benefits become taxable with combined income above $34,000 for single filers or $44,000 for joint filers. Combined income includes all taxable income, 1/2 of Social Security benefits, and some non-taxable income.
When the 1983 and 1993 reforms took effect, they were meant only to impose taxes on the country's wealthiest Americans. But because the thresholds at which benefits become taxable have not been indexed to inflation or adjusted since the rule changes were implemented, a growing number of people are subject to tax on the bulk of their benefits -- and this will only get worse as wages and benefits rise to keep pace with inflation so more people move into the taxed group.
While the Bidens can easily absorb the added cost of Social Security taxes, many seniors struggling to get by on a fixed income may find fulfilling their IRS obligations more difficult. And that's especially true for those who are also subject to state tax on their benefits. The Bidens didn't need to worry about their home state of Delaware taking a portion of their Social Security money, as Delaware is one of the 37 states that don't tax these retirement benefits. But there are 13 states where retirees do face taxes on benefits under at least some circumstances.
The revenue that comes from higher-earning Americans is an important source of income for Social Security, which is already facing financial shortfalls. With Mr. Biden setting his sights on expanding retirement benefits and shoring up the program's funding, it's unlikely the thresholds at which benefits become taxable will be raised any time soon.That means a growing number of future retirees could be taxed on 85% of their benefits.
The good news is, you may be able to reduce or avoid taxes on benefits if you choose a Roth IRA or Roth 401(k) for your retirement savings, as distributions from these accounts don't count as "income" in determining if your benefits are taxable. But if you have income coming from other sources, this won't be an option, and you'll simply have to accept that the IRS will take some of your retirement benefits away.