Analysts have determined that only 15% of the Social Security benefits you receive come from the income you earned while working. That’s money you already paid income taxes on. Every dollar you paid into Social Security was matched by a dollar your employer paid in on your behalf. That’s income you haven’t paid taxes on because it didn’t come to you through your paycheck.
The rest of your benefit comes from the interest earned on your money while it’s in the Social Security Trust Fund via investments in interest-bearing government securities. When this interest is paid to you through your Social Security check, it’s also income that you have not paid income taxes on.
Since the vast majority of your Social Security income has never been taxed, Congress passed a law in 1983 with bipartisan support, which President Ronald Reagan signed, to tax a portion of it. Since you already paid income taxes on 15% of your Social Security benefits, you cannot be taxed on more than the 85% that’s left.
What’s more, only the highest-income seniors pay income taxes on the whole 85%.
Still, some lawmakers want to exempt more — or all — Social Security benefits from the state income tax. Many say they want to do this to help low-income seniors. But since low-income seniors are already not paying taxes on their benefits, such a law would primarily benefit middle- and high-income seniors. In fact, if we exempted all Social Security income from taxes, 86% of the value of that tax break would go to those making more than $50,000 — which is higher than the income of most working families.