The tax burden on Social Security benefits isn’t just for couples filing joint returns. It’s an equal opportunity burden— it falls on singles, too. Whatever your marital status, you are subject to the tax if you have income from sources other than Social Security.

Almost any source will do. Pension? Check. Withdrawals from IRAs, 401(k)s and 403(b)s? Check. Dividends? Check. Capital Gains? Check. Savings account and bond interest? Check.

Even tax-free municipal bond interest? Yup.

So unless you are ready to live on Social Security benefits alone, you may pay taxes on at least a part of those benefits. The hard part is how you experience the tax, something economists call tax incidence. While labeled as a tax on Social Security benefits, we experience it in a different way.  The formula for the tax works so that you pay at a higher rate on each extra dollar of income from other sources.

One consequence: you’ll need to take more money out of your retirement account to buy anything. And that means you will drain your retirement accounts and savings faster than you would like— enough to cause real worry about outliving your savings.

Here’s an example. Suppose you are single and had a pretty good job before retiring. You also work a few years longer than most, so you retire to a Social Security benefit of $18,000 a year. Suppose you’ve also got a small pension and retirement accounts. These bring in $18,000 a year of other income. Your income tax bill for 2014 will be $733. That’s only $100 more than it would be if benefits weren't taxed.

It’s hard to complain about that— just $100 in extra income tax on an income of $36,000.

Unfortunately, that’s just what happens at the beginning of benefit taxation. Add more income and your tax bill gets a lot larger. Another $6,000 from your retirement account and your income rises to $42,000. But your tax bill will rise from $733 to $2,031. That’s an increase of $1,298 on other income of $6,000— an average tax rate of 21.6 percent on the added income. Instead of having $5,100 to spend after a normal 15 percent tax rate, you’ll only have $4,702. The difference is about $400 that isn’t in your pocket.

Increase your other income by another $6,000 to $30,000, and your tax bill rises from $2,031 to $3673, or an increase of $1,642. That means you’re paying $1,642 in taxes on that $6,000, an average tax rate of 27.4 per cent. So you’ve got $4,458 to spend instead of the expected $5,100.

Do the same thing again and your total income increases to $54,000. Your tax bill rises from $3,673 to $5,497. That’s an increase of $1,824, an average tax rate of 30.4 percent. It also means you’ve got only $4,176 to spend instead of the expected $5,100. Now you’re short over $900.

Most people would call that real money.      

Now consider the high effective tax rate on that added income. Remember, we’re not talking fat cats here.  We’ve only seen income increase from $36,000 to $54,000. On a normal return the tax rate wouldn’t hit 28 percent until taxable income exceeded $90,750. Social Security income gets there at a far lower income.

What does this mean for millions of middle-income retirees? Simple. The tax on Social Security benefits drains retirement accounts and savings.

These figures aren’t as bad as it can get. They’re just how it affects a middle-income single taxpayer. Raise the ante a bit, and it gets worse. Start with $30,000 in Social Security benefits.  Then increase other income from $30,000 to $36,000 and guess what happens? The tax bill balloons from $4,452 to $6,795. That’s an increase of $2,343. Although the single taxpayer has an income of $66,000, the tax rate on the last $6,000 is a whopping 39.1 percent.

The 39 percent tax rate is usually only applied to taxable income over $413,200. Only the top one percent of earners pays at that rate.  What we have here is a clear example of how insane both parties have made our tax system. (Remember, this is a bi-partisan hosing. Republicans initiated the tax under Reagan. Democrats increased it under Clinton.)

Bottom line: The taxation of Social Security benefits is a punitive and counterproductive idea.

How Much the Taxation of Social Security Benefits Increases Tax Bills for Single Seniors

This table shows how income taxes change with different amounts of Social Security benefits and different amounts of income from other sources. The income range covered is $36,000 to $72,000. The amounts shown are calculated for a single-person return using the standard deduction.  FIT=federal income tax.

Social Security $18,000 $24,000 $30,000 $36,000
$18,000        
FIT with SS Taxed $733 $2031 $3673 $5497
FIT without SS Taxed $633 $1420 $2336 $3252
Tax Increase $100 $  611 $1337 $2245
$24,000        
FIT with SS Taxed $883 $2367 $4062 $6146
FIT without SS Taxed $633 $1420  $2336 $3252
Tax Increase $200 $  947 $1726 $2894
$30,000        
FIT with SS Taxed $1115 $2757 $4452 $6795
FIT without SS Taxed $  633 $1420 $2336 $3252
Tax Increase $  482 $1337 $2116 $3543
$36,000        
FIT with SS Taxed $1451 $3145 $4840 $7444
FIT without SS Taxed $  633   $1420 $2336 $3252
Tax Increase $  818 $1725 $2504 $4192