Why Are We Taxing Social Security Anyway?

Social Security is often misunderstood, especially when it comes to taxes. Let’s break it down simply: Your Social Security can be taxable at 0%, 50%, or up to 85%.

But hold on—this doesn't mean you're actually paying a tax rate of 85%. It means that portion of your benefit could be subject to taxation at your ordinary income tax rate.

When Social Security began, it was never meant to fully cover retirement costs. Instead, it was created as a safety net, supplementing your personal savings and investments accumulated during your working years and co-care provided by family members. Yet today, about 40% of American retirees rely entirely on Social Security for their retirement income [1].

We've all seen the quotes highlighting why investing on your own matters: "Someone who consistently invested even a modest portion of their paycheck privately throughout their career could retire with significantly more wealth—and financial security—than relying on Social Security alone."

There's some truth to that, although these quotes typically overestimate returns and assume perfect consistency and contribution levels.

But even so, should Social Security be taxed? I don't really believe so.

The most a retiree can earn at full retirement age is about $4,000 per month. That's an investment equivalent value of roughly $1,500,000*. To me, that seems achievable since you need to make about $176,000 per year to reach the highest Social Security payout level [2]. Given this significant level of discount, it doesn't necessarily sit well with me that we tax Social Security benefits—but hey, here we are.

Ultimately, as we come to the end of tax season, don't forget: While Wisconsin doesn't tax your Social Security payments, the federal government certainly does, and the thresholds are fairly low. Combining this income with retirement account income, earnings on savings/CDs, and other income like farmland rent can add up quickly.

If you feel you're paying too much in tax, this time of year is the perfect time to review your tax returns and optimize your tax strategy.

Jose Alvarez

Founding Advisor

Harvest Horizon Wealth Strategies

* Assumption based on a 4% annual distribution rate, "The 4% Rule"

1. Bond, Tyler, Joelle Saad-Lessler, and Christian E. Weller. "New Report: 40% of Older Americans Rely Solely on Social Security for Retirement Income." National Institute on Retirement Security. January 14, 2020. https://www.nirsonline.org/2020/01/new-report-40-of-older-americans-rely-solely-on-social-security-for-retirement-income/.

2. Social Security Administration. "What are the maximum Social Security retirement benefits payable?" Accessed March 17, 2025. https://www.ssa.gov/faqs/en/questions/KA-01897.html.

The information presented in this blog is the opinion of the author and does not reflect the views of any other person or entity unless specified. The information provided is believed to be reliable and obtained from reliable sources, but no liability is accepted for inaccuracies. The information provided is for informational purposes and should not be construed as advice. Advisory services are offered through Harvest Horizon Wealth Strategies LLC, an investment adviser registered with the state of Wisconsin.