The Congresional Budget Office summarizes the taxation of social security benefits. It’s summary begins as follows:
About 60 million people received Social Security benefits in 2014, CBO estimates. Up to 85 percent of a recipient’s benefits are subject to the individual income tax, depending on the recipient’s overall income. CBO estimates that income taxes on Social Security benefits totaled $51 billion in 2014, an amount that will be credited to the Social Security and Medicare trust funds after the tax returns for 2014 have been filed and analyzed. (CBO expects that those taxes will account for only about 4 percent of the tax revenues received by those trust funds, which receive the other 96 percent of their tax revenues from payroll taxes.)
About half of all Social Security beneficiaries owed some income tax on their benefits in 2014, CBO estimates. Of total Social Security benefits received last year, 6½ percent were owed in income taxes, with smaller percentages owed by many beneficiaries and much larger percentages owed by high-income beneficiaries. Because of legislation and changes in the economy, the share of benefits subject to tax has risen over the past several decades.
Like Social Security, defined benefit pensions typically augment retirees’ income by paying out specified benefits whose size is related to the retirees’ past earnings. However, the share of benefits that is taxed is generally smaller for Social Security than for defined benefit pensions. That difference is minimal for high-income taxpayers but large for low- and moderate-income taxpayers.
Posted by Lewis J. Saret, Co-General Editor, Wealth Strategies Journal.