Social Security Benefits: Expert Warns of Shocking 'Stealth Tax'

Some Social Security benefits recipients may have to pay federal tax, according to Social Security Administration.

In these cases, it usually happens if you have substantial income on top of your Social Security payments. These incomes could be in the form of wages, self-employment, interest, dividends, and other taxable income that must be reported on your tax return.

It also does not help that Social Security benefits have an increase in the cost-of-living adjustment when it comes to taxation, as it may cause more benefits to be taxed.

Beneficiaries will pay tax on up to 50% of their Social Security benefits if they file a federal tax return as an individual and has a combined income between $25,000 and $34,000. If it is more than $34,000, you will be prompted to pay 85% of your benefits.

If you are filing a joint return and have a combined income between $32,000 and $44,000, you may have to pay income tax on up to 50% of your benefits.

Social Security Payments Tax

CNBC reported that older taxpayers may even find themselves owing more money to the government than they expected. The reason was the higher cost-of-living adjustment, which was 5.9% in 2022 and 8.7% this year.

In addition, the Social Security income levels have not been adjusted for inflation since the taxation of Social Security payments started in 1984.

David Freitag, a financial planning consultant and Social Security expert at MassMutual, noted that not adjusting the income brackets or indexing those gradually exposes more and more people to income taxes on their Social Security benefits. Freitag calls the taxation a "stealth tax."

A recent Senior Citizens League, a nonpartisan senior group, noted in their survey that 58% of older taxpayers want their Social Security thresholds adjusted.

Mary Johnson, the Social Security and Medicare policy at the senior group, noted that many feel that it was "ageist" and "discriminatory" that the threshold has not been adjusted. Johnson said many people want to remove the Social Security payments tax altogether.

To change the threshold of the income brackets, Johnson said that it will require the approval of the majority of House and Senate members.

Social Security Payments

Social Security payments are distributed through a schedule that SSA uses.

Recipients received two Social Security checks in March, which was the Supplemental Security Income.

SSI checks are usually distributed on the first day of every month. However, that day in April falls on a weekend.

If the schedule falls on a weekend or a holiday, it would be deposited to the recipients' accounts the nearest business day, which was why Social Security released two SSI checks in March.

The second SSI check was an advance payment for the month of April.

Aside from SSI, the SSA also distributes retirement benefits, Social Security Disability Insurance, and survivor benefits.

This article is owned by Latin Post.

Written by: Mary Webber

WATCH: How Social Security Works - from CNBC