Higher income beneficiaries (about the top 20 percent currently) pay taxes on their Social Security benefits. If a married beneficiary has adjusted gross income (including 50 percent of their Social Security benefits) exceeding $32,000 ( $25,000 for single persons), then 50 percent of the income above this amount is subject to taxation. For income above $44,000 ($34,000 for single persons), 85 percent is subject to taxation.

23.2 Why are my Social Security contributions considered taxable income by the IRS?

The reason for this is because the law so provides and then makes part of the benefit to be received later to be income-tax free. Some countries follow the reverse procedures and exempt them as a social insurance contribution from income tax, but then make the full benefits subject to income tax. It is possible that is could be done in the U.S., but the law would have to be changed to do so.

23.3 Has "means testing" been considered?

"Means testing" has been suggested as a reform proposal. It could be carried out in a variety of ways, including taxing the benefits of higher income beneficiaries at a higher rate than under current law, establishing an upper income limit for benefits, and reducing the cost-of-living increase for high income beneficiaries. Opponents of means testing believe that, over time, it would undermine the broad base of support for Social Security and turn it into a welfare-like program.

23.4 The marginal income tax on Social Security benefits can easily reach 45 percent, depending upon your other income. Is there any movement to correct this inequity?

The inequity is not as much as it seems, because part of such marginal rate is based on the withholding of benefits under the earnings test, and not taken into account is the fact that, because of such withholding, subsequent benefits will be larger.

23.5 To what extent are Social Security benefits subject to Federal and State income taxes?

For relatively high-income beneficiaries (about the top 20 percent currently), up to 85 percent of benefits are subject to Federal income taxation. Many States follow federal rules in the tax treatment of Social Security.

23.6 Why are Social Security benefits taxed? This should be a benefit and only "other" income taxed.

The federal income tax paid on Social Security benefits goes to the Social Security and Medicare trust funds, not the General Fund. In this way it helps to pay for future benefits. Because the income tax is progressive (higher income people pay a higher rate), some consider it fair for the beneficiaries with relatively high incomes from other sources to pay taxes on part of their income.