For most seniors, Social Security represents a necessary financial lifeline during retirement. National pollster Gallup has found that up to 90% of all seniors have leaned on their monthly payout from America's top retirement program to cover their expenses.
While we often think of retired worker benefits as something designed to help lifetime low earners, it's a payout available to any American citizen who earns the requisite lifetime 40 work credits. That includes the President of the United States, Joe Biden.
Joe Biden is bringing home a hefty Social Security check
For roughly 50 years, it's been somewhat of a tradition for presidential candidates and sitting presidents to make their federal tax returns public. Given Biden's previous runs at the Democratic Party presidential nomination, his time as vice president, and now his position as president, the American public has 25 years' worth of Joe Biden tax returns they can comb through, if they so choose.
On Tax Day, April 18, 2023, the White House made the Bidens federal tax return available. I say "the Bidens," because Joe Biden files jointly with his wife, first lady Dr. Jill Biden. For the 2022 tax year, the Bidens generated $579,514 in total income, most of which derived from a traditional W2.
But because both parties have met the requisite lifetime work credits to receive a Social Security benefit, both received hefty checks from the program last year. According to line 6a of the jointly filed Form 1040, Joe and Jill Biden collectively brought home $58,465 from Social Security in 2022.
When the Social Security Administration calculates an individual's Social Security benefit at full retirement age, it takes that worker's 35 highest-earning, inflation-adjusted years into account. With the Bidens adjusted gross incomes regularly surpassing Social Security's earnings tax cap for decades, it's not in the least bit surprising that the two are netting such a robust payout.
The Bidens are paying a hefty tax bill on their Social Security benefits, too
But here's something that might come as a bit of a surprise: The Bidens are being taxed quite extensively on their Social Security benefits.
According to line 6b of the Bidens federal tax return, $49,695 of their $58,465 collected was exposed to federal taxation in 2022. For married couples filing jointly with $431,901 to $647,850 in taxable income, like the Bidens, a 35% marginal tax rate at the federal level awaits.
To discover why Social Security benefits are taxable, we have to go back four decades. In 1983, Social Security's asset reserves -- i.e., the program's excess cash reserves built up since inception -- were running on fumes. The Social Security Amendments of 1983 represent the last major bipartisan overhaul of the program in response to its shortcomings.
The Amendments of 1983 gradually raised payroll taxation on workers, outlined a nearly four-decade increase for the full retirement age, and introduced the taxation of benefits for single filers and couples who earn above certain thresholds. The taxation of benefits went into effect in the 1984 calendar tax year.
When introduced, up to 50% of a single filer's Social Security payout could be exposed to federal taxation if their modified adjusted gross income (MAGI) plus one-half of benefits exceeded $25,000. For couples filing jointly, the income threshold was set at $32,000.
In 1993, the Clinton administration added a second tier of taxation for Social Security benefits. Up to 85% of benefits can be taxed at the federal rate for individuals whose MAGI plus one-half benefits exceeds $34,000. For couples, this figure is $44,000. Since the Bidens far exceeded this $44,000 threshold in 2022 (and every year prior), 85% of their Social Security payout is exposed to federal taxation.
The likelihood of paying tax on your Social Security benefit climbs every year
The thing is, the Bidens situation isn't unique. Due to cost-of-living adjustments (COLAs) gradually increasing Social Security checks over time, more and more retirees are being exposed to the taxation of benefits.
When the taxation of benefits was introduced 40 years ago, approximately 1 in 10 households were expected to be subject to this tax. But based on a Social Security Administration study in 2015, it was estimated that as many as 56% of households would owe some level of tax on their Social Security payout in the coming years.
The reason retirees' liability to taxation keeps increasing is because the income thresholds associated with the taxation of benefits have never been adjusted for inflation. The $25,000 (single filer)/$32,000 (joint filer) thresholds from 1983, and $34,000 (single filer)/$44,000 (joint filer) thresholds from 1993, are unchanged for the past 40 and 30 respective years.
As you might rightly guess, beneficiaries are none too happy with these tax liability-qualifying thresholds remaining unadjusted for inflation. Unfortunately, with Social Security staring down an estimated $22.4 trillion funding shortfall through 2097, according to the latest Trustees Report, there's virtually no chance of lawmakers adjusting these thresholds for inflation anytime soon.
Although Social Security collects approximately 90% of its revenue from the payroll tax on earned income (wages and salary), the program generated $48.6 billion in 2022 (4% of total revenue) from taxing Social Security benefits. With Social Security's asset reserves dwindling, the taxation of benefits is expected to take on even greater importance with regard to funding the program in the decade to come.
Long story short: Having your Social Security check taxed (in some capacity) like Joe Biden is probably the norm/expectation at this point for a majority of current and future beneficiaries.
The $21,756 Social Security bonus most retirees completely overlook
If you're like most Americans, you're a few years (or more) behind on your retirement savings. But a handful of little-known "Social Security secrets" could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $21,756 more... each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we're all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.