TAXING SOCIAL SECURITY BENEFITS

Social Security benefits were tax free for nearly 50 years. The law was changed in 1983 because the Social Security system was under funded. The idea was that revenue from taxing benefits of "wealthy" recipients would go back into the trust fund and make it solvent. As a result, a large group of taxpayers are getting slammed by inflation: seniors. The tax on Social Security income has not been adjusted for inflation since it was enacted. But unlike the uproar that the alternative minimum tax has caused, because it has started to affect those earning less than $100,000, this hitch in the tax code is getting almost no attention.

The law, aimed at taxing a portion of Social Security benefits for "high income" filers, already affects millions of middle-income seniors, who each pay thousands of dollars in additional tax as a result of it. And as baby boomers edge closer to retirement, it's certain to ensnare millions more. The tax on Social Security benefits is triggered when a senior's wage, pension, investment and dividend income exceeds a set threshold. At that point, a senior who fills out a return by hand must complete an 18-line worksheet that ultimately determines how much of his or her otherwise tax-free Social Security benefits will become taxable.

For a single senior, each dollar of income over $25,000 makes 50 cents of his or her Social Security benefits taxable. For married couples, that threshold is $32,000. The tax accelerates above income levels of $34,000 for singles and $44,000 for married couples, when each new dollar of income makes 85 cents of benefits taxable.

What's more, half of a senior's Social Security benefits are figured into the income threshold. So a senior with $25,000 in annual Social Security income would have $12,500 of that added into his total income level, meaning that if he earned only $13,000 in other income his government retirement benefits would become taxable.