It doesn’t seem fair that your Social Security benefits should be taxed by the federal government.  Isn’t this an example of double-taxation?

Double-taxation of Social Security may actually be a misnomer, but the way the government calculates the taxes and handles your benefits makes it hard to follow.  How do you determine how much of your Social Security benefits are subject to taxes?  Start by adding half of your Social Security benefits in any given year and add that amount to all your other income—including tax-exempt interest, which is otherwise not taxed by the federal government.  This number is known as your “combined income.”

If you’re a single filer and your “combined income” is above $25,000 but below $34,000, you’ll pay taxes on 50% of your Social Security benefits.  The same window is $32,000 to $44,000 for joint filers who combine their income and Social Security benefits to come up with their combined income figure.  If your combined income is above $34,000 (single filers) or $44,000 (joint filers), then you can expect to pay taxes on 85% of Social Security benefits.

Meanwhile, the FICA tax that was originally collected from your paycheck should be thought of as a benefit to you when you get older—which means it probably shouldn’t be thought of as a tax at all, but more like a contribution to a future annuity.

So, one answer is that there is no double taxation at the federal level; in fact, there isn’t even total single taxation, since the government never taxes 100% of your benefits.

But there’s another way to look at it.  The government is collecting its FICA payments after-tax, unlike an IRA contribution, which is made with pre-tax dollars.  IRAs are not subject to double taxation because the money is not taxed initially when the contribution is made, but then is taxed as ordinary income when the money comes out.  FICA payments are made with taxable income, and then taxed upon receipt either not at all, heavily or very heavily, depending on your income at the time.

Unfortunately, that’s not the whole picture.  13 U.S. states collect taxes on at least some Social Security income.  Minnesota, North Dakota, Vermont and West Virginia follow the same taxation rules as the federal government, so you might find yourself paying state taxes, plus federal taxes, on up to 85% of your benefits.  Nebraska, Colorado, New Mexico, Connecticut, Kansas, Rhode Island, Missouri, Utah and Montana are a bit more lenient with deductions and exemptions, but also dip their hand into your Social Security checks.

There are ways to lower your taxable income lower in retirement, including having more money in Roth IRAs whose distributions don’t show up on the tax form, and reducing the amount of money in your IRA—which reduces the required minimum distributions.  The Senior Citizens League has concluded that 44% of all Social Security recipients are paying no tax on their benefits, and at least some of that is the result of good planning.  Those people are indisputable, not subject to double taxation.  Whether the other 56% are, including those living in states that tax Social Security benefits, depends on your point of view.