Author: Ben Gelbart

Preface: “Everybody knows the deal is rotten. Old Black Joe’s still picking cotton for your ribbons and bows. And everybody knows.” — Leonard Cohen

Social Security – The Regressive Nature of Social Security

The following is the sixth in a series of blog posts on the subject of Social Security. The first five installments, which can be found here, here, here, here, and here:

• • • Reviewed the history of the Social Security program
    • Explained how to claim Social Security retirement benefits
    • Explained how to claim Social Security survivor and family member benefits
    • Explained how Social Security benefits are taxed
    • Explained how earned income is taxed to fund Social Security

This sixth installment will:

• • • Wrap up our discussion of FICA and how it is a regressive tax

Future posts in this series will address:

• • • Estimating Social Security’s returns on investment

Progressive vs. Regression Taxation

A flat tax is neither progressive nor regressive. Pennsylvania, for instance, at the time of this writing imposes personal income tax at a flat rate of 3.07%. A Pennsylvania resident who earned $10,000 will owe $307 in state income tax. His neighbor who earned $1,000,000 will owe $30,700.

Regular income tax imposed by the federal government has been progressive since its inception. While the rates and brackets have changed many times, the principle still holds that earners of higher incomes pay tax at higher rates.

Income tax brackets for 2026 are as follows:

Single	Married Filing Jointly	Rate
$0 – $12,400	$0 – $24,800	10%
$12,401 – $50,400	$24,801 – $100,800	12%
$50,401 – $105,700	$100,801 – $211,400	22%
$105,701 – $201,775	$211,401 – $403,550	24%
$201,776 – $256,225	$403,551 – $512,450	32%
$256,226 – $640,600	$512,451 – $768,700	35%
$640,601 and up	$768,701 and up	37%

As discussed in the previous installment in this series, the FICA tax collected to fund Social Security is a separate tax collected in parallel and in addition to regular income tax. And as we will show here, FICA is a regressive tax. It is assessed at a higher rate on lower-income earners.

This is strange when you consider that the people who instituted FICA, Franklin Delano Roosevelt and his team, were political progressives. The reason they insisted on doing it this way is that they did not want Social Security to be perceived as a tax, but as an insurance product sold to the public without regard to income.

They were worried that if Social Security were seen as a tax on the rich to benefit the poor, it would fail politically. As Wilbur Cohen put it at the time: “In the United States, a program that deals only with the poor will end up being a poor program.”

So it was not their intention that it be regressive. It is regressive simply because any fixed cost represents a larger portion of a poor’s man income than of a rich man’s. In this sense, a loaf of bread is regressive, too, since its price comprises a larger percent of the poor man’s paycheck than of the rich man’s.

But regressive it is, and this becomes more of a problem both financially and politically the more expensive it gets.

The Unique Structure of Social Security

Because Social Security is not supposed to be a tax, it must be collected through a special kind of collection – FICA –that is not income tax. Because it is not supposed to be needs-based, it must be paid to rich people as well as to the poor. Because it is supposed to be insurance or some kind of investment product, the benefits paid out must scale to the premiums paid in.

None of this was done because it was ethically just or financially sound. It was for what were political marketing considerations to get the legislation passed in 1935.

In a previous post, we reviewed how Social Security retirement benefits are calculated based on lifetime earnings. The result is that high-income earners receive large benefits while low-income earners receive meager benefits.

Consider also that high-income earners tend to live longer and so receive their large benefits for more years while the low-income earners tend to receive their meager benefits for fewer years.

Consider also that high-income earners are more likely to be married and so are more likely to have surviving spouses who can take survivor benefits. And the surviving spouses of the rich are also more likely to live longer than the surviving spouses of the poor, etc.

Regressive enough for you? It gets more regressive still…

How Regressive Does It Get?

Ironically, the most nakedly regressive aspect of FICA was put in place to stop high earners from collecting too much in Social Security retirement benefits. This is the famous “cap” on income considered for Social Security purposes. For 2026, the cap on Social Security income is $184,500.

This means that no matter how much money you earned in 2026, you cannot claim more in Social Security retirement benefits than someone who earned $184,500. And due to the unique nature of the legislation passed in 1935, it also means you do not pay more in OASDI-FICA than someone who earned $184,500.

Consider how this plays out among three employees of the same company. To keep the model simple, we are considering only the employee half of the OASDI portion of FICA:

EXAMPLE:	Larry	Moe	Curly
Employee gross pay	$10,000	$184,500	$1,000,000
Wages subject to FICA(OASDI)	$10,000	$184,500	$184,500
Employee FICA(OASDI)	$620	$11,439	$11,439
OASDI as % of gross pay	6.2%	6.2%	1.14%

Moe is paying more in OASDI-FICA than Larry, but only because Moe earns more. They are both paying at the same rate of 6.2%.

Curly is paying the same in OASDI-FICA as Moe. However, because his income is so much higher, this represents a far small portion of his income than Larry or Moe’s payments represent of theirs.

It’s hard to think how old FDR and his boys could have designed a more regressive system if they’d tried.

Preface: “I pay my income tax and the government gives back what I got coming. Lord, but it ain’t much.” — Merle Haggard

Social Security – How Earned Income is Taxed to Fund Social Security

The following is the fifth in a series of blog posts on the subject of Social Security. The first four installments, which can be found here, here, here, and here:

• • • Reviewed the history of the Social Security program
    • Explained how to claim Social Security retirement benefits
    • Explained how to claim Social Security survivor and family member benefits
    • Explained how Social Security benefits are taxed

This fifth installment will discuss:

• • • How earned income is taxed to fund Social Security

Future posts in this series will address:

• • • Estimating Social Security’s returns on investment

The Bi-Weekly Bite

If you look closely at your bi-weekly paycheck, you will see a large hole. This hole is the gap between gross pay and net pay. The teeth marks reveal the identity of the biters. One of the largest is almost always “OASDI” a.k.a. Social Security. It is equal to 6.2% of your gross. Another hungry mouth is Medicare at 1.45%. Together, these make up the 7.65% employee half of FICA. If your gross was $10,000, you paid $765 in employee FICA.

As noted in a previous post in this series, FICA stands for Federal Insurance Contributions Act. It was introduced to fund the Old Age, Survivors, and Disability Insurance (OASDI) benefits established by the Social Security Act of 1935. At the time of its creation, FICA was set at 2%, but is now 15.3% of wages and self-employed income.

“No problem,” you might be thinking, “I’ll get some of it back as a refund when I file my taxes, right?” WRONG. FICA is non-refundable. Regular income tax in excess of your tax liability is an easy refund. But FICA and regular income tax are two parallel but separate tax systems  computed under different rules.

If you have no income tax liability for the year, you will be refunded whatever was withheld for regular income tax purposes, $235 in the above example. If you have some income tax liability but less than your withholding, you will be refunded the difference. But this does not apply to FICA withholding because FICA is used to fund Social Security benefits, not to offset income tax liability.

Furthermore, many types of payroll deduction such as pensions and health savings accounts will reduce your income that is subject to income tax. But nothing will reduce your income subject to FICA:

Notice that deductions for your pension and other benefits reduce your wages subject to income tax, but do not reduce your wages subject to FICA. FICA is computed as a percentage of your gross pay before other deductions.

How the Other Half Bites

But that is only half the damage done by FICA. In the above examples, your employer paid the full $10,000 of employee gross pay and is allowed to deduct it as a business expense. However, your employer also paid the employer half of FICA and it is allowed to deduct that as well. In other words, for every $10,000 you see in gross pay, your employer had to pay that plus another $765 that that you don’t even see.

So, for every $10,765 your employer pays to employ you, the government gets $1,530 in FICA while $9,235 is left over for you. Out of this you must then pay your regular income tax on a wage base considered to be $10,000.

“No problem,” you might be thinking, “The employer half of FICA is my boss’s problem, not mine.” But from your employer’s point of view, this is money paid to employ you. It is effectively part of your compensation package. In the end, it is that much less money that is left over that can be offered to you as take-home pay or benefits.

How FICA is Collected from the Self-Employed

If you are self-employed, you must pay both the employee and the employer halves of FICA in the form of self-employment tax. You do get to deduct the employer half from the amount of your income that is subject to regular income tax.

For the self-employed, if you have at least $400 in self-employed income, you must file an income tax return for the year even if you are not otherwise required to file. This is because you must pay the self-employment tax even if you have no ordinary tax liability.

This is similar to how FICA withholding for employees is not refundable even when they have no regular income tax liability. Employees do not even get the $400 safe harbor. Even if you only earned $1 at your job, 15.3¢ is getting collected in FICA. It respects neither the standard deduction, itemized deductions, student loan interest, child tax credit, or section 11 bankruptcy.

You may not think the term “self-employed” will ever apply to you. But if you receive any payment for work you did as a non-employee, you are subject to self-employment tax. This could be anything from babysitting or mowing lawns or selling popcorn at a sports event, to consulting fees or contract labor.

What Happens to FICA after It Is Collected?

“No problem,” you might be thinking, “I’ll get all that FICA back when I retire and collect my Social Security benefits.”

Well, maybe. But first, you have to live long enough to collect it. Not everybody does.

Second, even though Social Security is described as a trust fund held to pay out benefits, it is important to understand what this means and what it doesn’t mean. The U.S. Supreme Court has ruled in Flemming v. Nestor (1960) that paying into Social Security does not mean you have a legal claim to benefits. In other words, it is illegal for the government to use FICA money for any other purpose than to pay Social Security benefits. But there is no legal requirement that they pay the benefits. As far as who gets the benefits, it is first come first served. And there is no reason to assume there will be enough left for you when the time comes, even if you do live that long.

Third, and this will be the topic of a future post in this series, how much are those benefits worth compared to what you paid in over the course of your working life?

Monthly and Quarterly Payments and Filing Requirements

In addition to the financial toll it imposes, FICA also places reporting and remittance burdens on employers and the self-employed that raise the barriers to doing business and are likely a significant inhibitor to business formation in the United States. Businesses that do get off the ground must continually devote time, effort, and resources to monitoring their own compliance or paying third parties to assume these responsibilities for them.

Since employees have their share of FICA taken out of their wages by their employer in each pay cycle, they are not required to make any additional FICA-related payments or reports.

Employers are required to remit both their half and their employees’ half of FICA to the government on at least a monthly basis and to report the totals on Form 941 on a quarterly basis. Penalties for failing to make the required payments and filings are severe. This applies to all employers from the largest mega-corporation down to the smallest food truck.

The self-employed are required on a quarterly basis to pay estimates towards their expected annual amount of self-employment tax. You will incur penalties for not paying sufficient estimates in a timely manner even if you do not end up owing any income tax. Penalties on the self-employed will be waived if the annual shortfall is less than $1,000, or less than 10% of annual tax liability, or if the total of the year’s estimated payments would have covered the prior year liability.

The damage done by FICA to employers, employees, and to the self-employed is real and cuts deep: 15.3% of income wiped out before income tax or other deductions are even considered, let alone money left to pay for food, housing, clothing, or personal savings. FICA eats away your ability to generate capital, buy a home, start your own businesses, and leave something to your children. Unlike regular income tax, it cannot be refunded or abated or challenged by appeal or in tax court.

Preface: “Since 1984, the proportion of beneficiary families whose benefits are taxed has risen over time from less than one in 10 to more than half” – Income Taxes on Social Security Benefits from Social Security Administration: Research, Statistics & Policy Analysis

Social Security – How Your Social Security Benefits Are Taxed

The following is the fourth in a series of blog posts on the subject of Social Security. The first three installments, which can be found here, here, and here:

• • • Reviewed the history of the Social Security program
    • Explained how to claim Social Security retirement benefits
    • Explained how to claim Social Security survivor and family member benefits

This fourth installment will discuss:

• • • How Social Security benefits are taxed

Future posts in this series will address:

• • • How earned income is taxed to fund Social Security
    • Estimating Social Security’s returns on investment

Tax on Social Security Benefits

For almost the first 50 years of Social Security, Social Security retirement benefits were not subject to income tax. It was only with the Social Security Amendments of 1983 that they became partially taxable for some recipients. This taxation of benefits went into effect in 1984 and has been with us ever since. In fact, it has expanded apace.

The 1983 law set up dollar thresholds above which 50% of Social Security benefits become taxable. These thresholds are $32,000 for married taxpayers filing jointly and $25,000 for all other filers with one exception: for married taxpayers filing separately who lived together at any time during the year, the threshold is zero.

For purposes of applying this threshold, only half of the Social Security benefits themselves are considered. Also, tax-exempt interest income is added back.

Note that 50% of benefits being taxable does not mean that your benefits are subject to a 50% tax rate. It means that half of those benefits are taxed at your ordinary rate. The other half remains tax-free.

Amazingly, the dollar amounts of these thresholds have not been adjusted for inflation since they were first introduced in 1983. It is interesting to speculate whether this legislation would have received the support it did at the time if people had realized it would eventually apply to a majority of benefit recipients.

While most of this expansion was accomplished through inflation, a change was made a decade later that subjected some portions of benefits to an even higher degree of taxability. The Omnibus Budget Reconciliation Act (OBRA) of 1993 defined a second set of thresholds above which 85% of Social Security benefits are subject to income tax. This higher threshold is $44,000 for married filing jointly and $34,000 for other filers. These thresholds have likewise never been adjusted for inflation.

If income as computed for Social Security purposes falls above the upper threshold, then 85% of that amount of Social Security benefits is subject to tax. Any amount of benefits that falls between the thresholds is 50% taxable, but not if that would make the total taxable portion more than 85% of the benefit received.

If you would like SSA to figure the taxable amount for you, they provide their own calculator here. Many other websites provide unauthorized versions of a similar calculator.

“No Tax on Social Security”

While there was talk in the presidential campaign of 2024 about eliminating tax on Social Security benefits, what the One Big Beautiful Bill Act of 2025 (OBBBA) ended up doing was introducing an entirely new tax deduction for taxpayers over 65.

Beginning in tax year 2025, this new deduction is worth $6,000 per individual. It begins to phase out for married filers with adjusted gross income over $150,000 and fully phases out at $250,000. For single filers, these phaseout thresholds are $75,000 and $125,000. The deduction is available to anyone within these income thresholds who is of age without regard to the amount of Social Security benefits being received. In fact, you don’t have to be receiving any Social Security benefits at all to take this deduction.

The deduction will expire after tax year 2028 if it is not renewed by an act of Congress.

There has still been no change in the law governing taxation of Social Security benefits since OBRA of 1993.

Treatment of Lump Sum Benefits

If a Social Security benefit is for any reason delayed beyond the year it originated and is paid instead in a later year, it is treated for tax purposes as received in the year it was actually paid. Prior year tax returns cannot be amended to include benefits that were not received until a later year. This can result in an unusually large payment in the current year know as a “lump sum” benefit.

The only relief available to recipients of lump sum benefits is an election to figure the taxable amount of the lump sum based on the year the payment originated. The taxable amount of payments that originated in a prior year can be calculated as if they had been received in the prior year. The amount that would have been taxable in the prior year can then be considered the amount taxable in the current year, if this is more beneficial to the taxpayer.

Claim of Right

Occasionally, Social Security benefits must be repaid. For tax purposes, any amount repaid in the current year can be deducted from the amount received in the current year. However, if for any reason a benefit received in one year is not repaid until a later year, tax relief is only available as “claim of right” under Internal Revenue Code Section 1341.

Claim of right is a doctrine that applies to cases where income that was taxed in a prior year is repaid by the taxpayer in a later year. This same doctrine applies to wages or bonus repaid to an employer and also to repayment of unemployment benefits.

If the amount is less than $3,000, no relief is available.

Any claim of right amount greater than $3,000 can either be deducted as an itemized deduction on Schedule A or figured as a refundable credit on Schedule 3, whichever is more beneficial to the taxpayer. The credit is figured in the following way:

• • • Tax is refigured for the year in which the amount was originally reported in income, but as if that amount had never been received.
    • The difference between the refigured tax on the prior year and the actual tax in that prior year is then the credit that may be claimed in the current year.

Preface: “We can never insure one hundred percent of the population against one hundred percent of the hazards and vicissitudes of life, but we have tried to frame a law which will give some measure of protection to the average citizen and to his family against the loss of a job and against poverty-ridden old age.” –– Franklin D. Roosevelt, Statement on Signing the Social Security Act

Social Security – Claiming Family Member and Survivor Benefits

The following is the third in a series of blog posts on the subject of Social Security. The first two installments, which can be found here and here:

• • • Reviewed the history of the Social Security program
    • Listed the different types of Social Security benefits
    • Explained how to claim Social Security retirement benefits

This third installment will discuss:

• • • Claiming family member benefits
    • Claiming survivor benefits

Future posts in this series will address:

• • • How earned income is taxed to fund Social Security
    • How Social Security benefits are taxed
    • Estimating Social Security’s return on investment

Social Security is known as a sort of a pension plan, as the retirement benefits do provide partial income replacement for retirees. But Social Security boasts a generous number of other types of benefits. Survivor benefits function as a sort of a life insurance for the benefit of dependents whose providers have passed away. And family member benefits, in particular spousal benefits, provide supplemental income to family members of living retirees.

Family Member Benefits

Family members of people who are receiving Social Security retirement benefits can, if certain conditions are met, receive their own benefits that are computed as a percentage of the benefit received by the recipient of the retirement benefit. Before we delve into the details of which family members are eligible and what percentage they receive, it is important to understand that family member benefits do not come at the expense of the retirement benefits.

EXAMPLE:

I am retired and eligible to receive a $2,000 per month Social Security retirement benefit. My wife is entitled to a spousal benefit worth 50% of mine. She will receive $1,000 per month in addition to my $2,000 per month. Her benefit will not be deducted out of my benefit.

And so for all family member benefits (but see The Family Maximum at the end of this article).

Another important principle of family member benefits is that anyone who is eligible for his or her own retirement benefit cannot claim both that retirement benefit and a family member benefit. Generally, you will choose the benefit that is larger.

EXAMPLE:

I am retired and eligible to receive a $2,000 per month Social Security retirement benefit. My wife is entitled to a spousal benefit worth 50% of mine. However, she is also entitled to a retirement benefit in her own right.

If her retirement benefit is larger than $1,000, she is better off taking that and foregoing the family member benefit.

If her retirement benefit is larger than $4,000, then I am better off foregoing my own retirement benefit as I can instead claim a family member benefit worth 50% of hers.

Both spouses and dependent children may receive family member benefits. Neither type of benefit can be more than 50% of the value of the retirement benefit. For this purpose, the base amount is the retirement benefit as claimed by the retired individual at full retirement age (FRA). Current law defines (FRA) for people born in 1960 and after as 67. As covered in a previous blog post, a retiree can claim a larger amount by waiting until past FRA to claim. However, family member benefits are in any case based on the FRA benefit.

A spouse must be 62 years or older to receive the family member benefit, or any age if taking care of a child who is younger than age 16 or has a qualifying disability.

The percentage value of a spousal benefit depends on the spouse’s own age when claiming the benefit. At full retirement age (FRA), the spouse can claim the maximum 50%. For each year before FRA, the percentage is reduced slightly, down to a minimum of 32.5% if claiming at age 62.

A dependent child must be younger than 18 to receive the family member benefit, or younger than 20 if a full-time student, or any age if having a disability that began before age 22.

Dependent child benefits are generally not less than 50% of the retirement benefit. But see The Family Maximum at the end of this article

Employing a Spouse as a Social Security Strategy

There is no legal impediment to employing your spouse. A spouse-employee should be paid a wage comparable to what you would pay a non-related employee for doing the same work. If you decide to do this, you should understand that you are making your spouse an employee who must be paid for work that is actually performed, the same as any other employee. You cannot just pay part of your salary to your spouse and then expect that your spouse can claim Social Security credit on it. If you both perform work for the business, you must each receive a salary based on your respective roles. As your spouse’s employer, you will be paying the employer share of Social Security and Medicare taxes (FICA) based on your spouse’s wages. The only special dispensation you have as a spouse-employer is that you do not have to pay FUTA (federal unemployment) taxes on a spouse’s wages.

If the only reason for employing your spouse is to build eligibility for future Social Security benefits, consider that a spouse is in any case entitled to family member benefits when you retire based on your earnings.

Survivor Benefits

Three types of dependents may qualify for Social Security survivor benefits based on a deceased family member’s Social Security retirement benefits:

• • • Spouses and ex-spouses who were married to the deceased at least 9 months, have not remarried, and are age 60 or older (age 50 or older if with a disability)
    • Children age 17 and younger, or aged 18-19 and in K-12 education, or any age if with a disability acquired at age 21 or younger
    • Dependent parents age 62 or older who have not remarried and who are not receiving Social Security benefits in their own right that would be greater than the survivor benefit.

Survivor benefits are paid as a percentage of the benefits that would have been paid to the deceased at full retirement age (FRA).

Children receive payments at 75%.

The value of a payments for a spouse or ex-spouse depends on the spouse’s or ex-spouse’s own age when claiming the benefit. At full retirement age (FRA), the spouse or ex-spouse can claim 100%. For each year before FRA, the percentage is reduced slightly, down to a minimum of 71.5% if claiming at age 60.

A lone dependent parent receives 82.5% percent and two dependent parents receive 75% each.

Lump-sum Death Payment

SSA also offers a one-time payment, currently $255, to a surviving spouse. Or, if there is no spouse, to children according to the same age limits as would be eligible for survivor benefits.

This payment must be applied for within 2 years of the family member’s death.

The Family Maximum

While these benefits are generous, the SSA does impose a limit on the total benefits payable to the family of a beneficiary. This restriction was introduced in 1980 as one of Congress’s many attempts to control the costs of Social Security by reducing payments to families they suspected were relatively well off.

Note that this is a limitation on benefits paid to members of the same family based on the monthly amount paid to one recipient of Social Security retirement benefits. If two spouses each receive their own retirement benefits, they are not subject to limits based on the other’s benefits.

The monthly maximum is calculated as follows:

• • • Start with the baseline monthly retirement benefit of the individual beneficiary as computed at FRA.
    • This monthly amount is divided into four segments. For 2026, these segments occur at $1,643, $2,371 and $3,093. These are known as “bend points”.
    • Income up to the first bend point is multiplied by 150%, above the first and up to the second by 272%, above the second and up to the third by 134%, and above that by 175%.
    • Add these four amounts together, and that is the maximum monthly benefit for that beneficiary’s family.

Benefits received by ex-spouses aren’t counted toward the family maximum.

The concluding graph shows the monthly maximum family benefit as a function of baseline recipient benefit value at Full Retirement age (FRA). Note that for 2026, the maximum retirement benefit at FRA is $4,152 per month.

Preface: “The estimated average amount changes monthly. For example, the estimated average monthly Social Security retirement benefit for January 2026 is $2,071.”– https://www.ssa.gov/faqs/en/questions/KA-01903.html

Social Security – Claiming Retirement Benefits

The following is the second in a series of blog posts on the subject of Social Security. The first installment, which can be found here:

• • • Reviewed the history of the Social Security program
    • Listed the different types of Social Security benefits

This second installment will discuss:

• • • When you can claim Social Security retirement benefits
    • The amount of your Social Security retirement benefits
    • Working while receiving Social Security retirement benefits

Future posts in this series will address:

• • • Claiming survivor and family member benefits
    • How earned income is taxed to fund Social Security
    • How Social Security benefits are taxed
    • Estimating Social Security’s returns on investment

Social Security Credits

To claim Social Security retirement benefits, you must have accumulated at least 40 Social Security “credits”. This really just means the Social Security Administration (SSA) wants to make sure that you worked for a non-trivial amount of pay for at least ten years. The credits are counted as follows:

• • • Anyone born in 1929 or later needs 40 credits to be eligible for retirement benefits.
    • A maximum of four credits can be accumulated per year.
    • In 2026, you receive 1 credit for each $1,890 of earnings, up to the maximum of 4.
    • Each year, the dollar amount of earnings needed for a credit goes up slightly.

Once you’ve reached 40 credits, you are eligible to claim benefits when you reach retirement age. There is no partial credit for less than 40 credits, nor is there any particular significance to attaining more than 40. The dollar amount of your benefits will be determined by a graduated formula that we discuss in more detail in the next section.

If you are not sure whether you have accumulated sufficient credit or you want to see what kind of monthly benefit you can expect to receive, you can find all this out by creating a free and secure account with the SSA at https://www.ssa.gov/myaccount/. You will not need to give the SSA any information about your work history. They already have it. Once you create the account, they will make this information visible to you.

The Amount of Your Security Retirement Benefits

The year in which you claim your Security retirement benefits, a monthly benefit amount is calculated based on your earnings history. The SSA then pays you monthly benefits for the rest of your life, starting with this amount and adjusting it each year for inflation.

The monthly benefit amount is calculated thus:

• • 1. Earnings from all the years you worked are converted into present-year dollars.
    2. The 35 highest-earning years are selected. Income above the annual threshold is ignored. For 2026, the threshold is $184,500.
    3. A monthly average is computed.
    4. The monthly average is divided into three segments. For 2026, these segments occur at $1,286 and $7,749. These are known as “bend points”.
    5. Income up to the first bend point is multiplied by 90%, above the first and up to the second by 32%, and above that by 15%.
    6. Add these three discounted amounts together, and that is the baseline for your monthly benefit.

This baseline amount may be further modified depending on how old you are when you claim, as follows:

• • • Current law defines full retirement age (FRA) for people born in 1960 and after as 67. If you claim retirement benefits at FRA, you receive 100% of the benefit as calculated.
    • If you claim retirement benefits before reaching FRA, your benefit is a reduced percentage. The reduction is 6.67% per year for each of the first three years and 5% per year for the remaining two years. The earliest age for claiming retirement benefits is 62, in which case you will only receive 70% of the amount.
    • If you wait past FRA to claim the benefits, they are increased above 100% by 8% a year up to a maximum of 124% if you claim at age 70. There is no additional benefit to waiting beyond age 70 to claim.

So, if you wait until you are past age 62 to claim retirement benefits, you will have greater benefits going forward. However, you will miss out on the benefits you didn’t receive during the years you were waiting.

The benefits you get the year you claim are then adjusted for inflation each year.

Working While Receiving Social Security Retirement Benefits

If you continue to work and earn income after you begin receiving Social Security retirement benefits, your retirement benefits may be reduced. For this purpose, “earned income” includes wages and self-employment income. It does not include passive or investment income, or income from annuities, pensions, IRAs, or other retirement benefits.

If you are younger than FRA, you are subject to a limit above which your retirement benefits will be reduced. For 2026, that limit is $24,480. If your earned income for the year is within the limit, your Social Security retirement benefits will not be reduced. Every dollar you earn over the limit will reduce your benefit total by 50¢ for the year.

For the year in which you reach FRA, the limit is $65,160. However, the limit only applies to earnings during the months before you reach FRA. Every dollar earned above the limit reduces your benefits by 33¢ for the year.

If you are older than full retirement age (FRA), no amount of income you earn will reduce your Social Security retirement benefits.

Earned income during years you receive Social Security retirement benefits is still subject to FICA. If your earnings at this time are high enough, the SSA may recalculate and increase your baseline benefit.

In the next post we will explain who can claim survivor and family member benefits and how they are figured.

Preface “In the United States, a program that deals only with the poor will end up being a poor program.” – Wilbur J. Cohen

Social Security – An Introduction

The following is the first in a series of blog posts on Social Security. This first installment:

• • • Reviews the history of the Social Security program
    • Lists the different types of Social Security benefits

Future posts in this series will address:

• • • Claiming retirement benefits
    • Claiming survivor and family member benefits
    • How earned income is taxed to fund Social Security
    • How Social Security benefits are taxed
    • Estimating Social Security’s returns on investment

A Brief History of Social Security in the United States

Social Security was established with the Social Security Act of 1935. Its goal is to provide government insurance of income to the elderly and disabled and their dependents. It is administered by the Social Security Administration (SSA), an independent agency of the federal government created by the same 1935 act. It is the most significant and enduing of president Franklin Roosevelt’s New Deal programs.

The Social Security program was modeled on an earlier program designed to provide benefits for railroad workers under the Railroad Retirement Act of 1934. A year later, the federal government decided to create a similar system that would be mandatory on all types of employers.

When we speak of receiving “Social Security”, we are usually thinking of what is technically Old Age, Survivors, and Disability Insurance (OASDI). OASDI is funded by a special kind of income tax called Federal Insurance Contributions Act (FICA) tax.

The original Social Security Act established FICA tax so that Social Security would not be seen as government assistance for the indigent, but instead as an insurance program for all. Seen this way, FICA is not really a tax, but a mandatory insurance premium. This unusual feature of what would otherwise be just another government spending program continues to play a role in all discussion of possible changes to Social Security as it approaches the end of its first century of existence.

The Social Security Amendments of 1965 created Medicare, a government health insurance program run along similar lines to Social Security. Medicare is administered by the Department of Health and Human Services. These same 1965 amendments also expanded FICA taxes to include funding for Medicare.

By 1972, it was clear that FICA was not sufficient to fund Social Security needs. The Social Security Amendments of 1972 established a second program under SSA called Supplemental Security Income (SSI). Unlike OASDI, SSI is funded by U.S. Treasury general funds. These are the same general funds that fund other government programs. There is no pretense that SSI is a form of insurance.

A Brief Explanation of How FICA Works

At first, Social Security applied only to employees and not to the self-employed. The 1935 act established payroll withholding for the first time in history. This was done so FICA could be deducted from employees’ wages. The act also required, for the first time in history, that employers report and remit the withholding on a quarterly basis. Both the withholding and quarterly filing requirements for employers remain in place today and have expanded beyond their original purposes.

Within a decade, the federal government realized that with these new powers, they could collect and track withholding on regular income tax in addition to FICA. Income tax withholding and employers’ obligation to include it with quarterly payroll returns were codified in law with the Current Tax Payment Act of 1943.

Within another decade, mandatory participation in Social Security was extended to the self-employed with the Self-Employment Contributions Act of 1954. Since the self-employed have no wages to withhold, this act created a new kind of tax just for them. It was originally called SECA tax after the name of the act. It is now usually just called “self-employment tax”. This tax on the self-employed is figured in the same way as FICA and all FICA rate increases and other modifications over the years apply to the self-employed as well.

FICA was originally set at 2% but is now 15.3% of wages and self-employed income. Of this, 12.4% is due to Social Security and 2.9% to Medicare. The Affordable Care Act of 2010 (ACA or “Obamacare”) increased the Medicare portion to 3.8% on income above $200,000 ($250,000 for married filing jointly).

In a later post, we will discuss the nuts and bolts of FICA in more detail.

In general, FICA is a parallel income tax system collected by the IRS using the same processes as regular income tax (withholding, estimated tax payments, etc.). This is unusual in that the federal government has many, many different programs, probably more than anyone could ever count, that all require funding, and yet none besides OASDI and Medicare have their own special income tax that is collected and tracked separately.

We often hear in the news that Social Security will run out of funds by a certain year. This may well be true. Yet we never hear this said about the Air Force, the Small Business Administration, the Environmental Protection Agency, the Smithsonian, the National Endowment for the Arts, SNAP, NASA, etc., etc. Are all these other programs perfectly solvent? Hardly. There is just no pretense that they are to be self-funded, each through a special tax designed specifically for that program.

If you look at your W-2, you will see boxes for Social Security and Medicare deductions. You will not see a Navy deduction, an FBI deduction, a National Park Service deduction, etc. If any of those agencies need more money, the federal government will simply put itself further into debt to give it to them. Are we to believe that if Social Security needs more money, the government will just shrug and say: Sorry, dear senior citizens, you’re on your own…?

On the other hand, maybe it would be a good idea if every government program had to be funded through its own special line item income tax and could expect no additional funding. It would certainly make very transparent to taxpayers how much out of each paycheck was going to what program. At present, 15.3% is going to OASDI and Medicare, and apparently even that is not enough to keep them running for much longer.

Types of Social Security Benefits

There are two basic types of OASDI benefits:

• • • Disability (DI) –  A person of any income level found disabled by the SSA can claim benefits.
    • Retirement (OASI) – This is what we usually mean when we think of “Social Security”.

Benefits can also be claimed by:

• • • Survivors – This is the “S” in “OASI”. Surviving spouses and dependents of deceased OASI recipients can continue to claim the deceased recipient’s benefits.
    • Family members –family members of living OASI and DI recipients can claim benefits. Family member benefits are computed as a percentage of the primary recipient’s benefits.

The next post will explain who can claim retirement benefits and how they are figured.

Preface: “Myth is the mountain whence all the different streams arise which become truths down here in the valley.” – C.S. Lewis

Claiming Dependents: Myths and Facts 

Myth: Once my kid turns 18 (or some other age), I can’t claim him anymore.

Fact: You can only claim the full amount of child tax credit ($2,200 in 2025) for qualifying children who were under 17 at the end of the calendar year. However, you can still claim the lesser amount of $500 for qualifying children who were under 19.

If your child was a full-time student, you can continue claiming him until the year he turns 24.

If your child is permanently and totally disabled, there is no age limit. How do you know if your child qualifies as permanently and totally disabled? Ask a doctor.

A child who meets the requirements of a qualifying relative can still be claimed as a dependent regardless of age. The credit for a qualifying relative is $500.

Myth: If you are married and are the primary earner, you can claim your spouse as a dependent.

Fact: If you are married at the end of the calendar year, you must choose between married filing jointly (MFJ) and married filing separately (MFS) for that year. The MFJ status offers lower tax rates and a higher standard deduction. That is a tax break available to married couples. You cannot claim your spouse as a dependent regardless of who earns the income.

Myth: If my child earned more than $5,000 (or some other amount), I can’t claim him anymore.

Fact: There is no dollar threshold on the income of children who can be claimed as dependents. The support requirement for qualifying children says that a qualifying child must not have provided more than half of his own support. It doesn’t even say that you must have provided more than half, just that the child can’t have provided more than half. And it says nothing of any dollar limit.

What you are probably thinking of is the gross income requirement that applies to qualifying relatives. This was $5,200 in 2025. There is no gross income requirement for qualifying children.

Myth: If my kid had a job and I am claiming him as a dependent, then I report his income on my tax return.

Fact: If your child earned enough to meet filing requirements, he must file his own return and pay his own tax. If he does not meet filing requirements, then his income is tax-free.

If your child had withholding through his paycheck, he may want to file even when not required to in order to claim a refund.

If you are claiming a child as a dependent and that child is filing a tax return, the child’s return must check the box that says “Someone can claim you as a dependent”. If the boxes are mismatched, processing of the returns may be delayed.

In the event that your child had more than $2,700 in unearned income (bank interest, investment income, etc.), then the amount of unearned income above the limit will be taxed at your tax rate. This is known as the “kiddie tax”. It is intended to stop rich parents from avoiding tax by shifting their investments to their children.

Myth: If two people try to claim the same child in the same year, the one with court-ordered legal custody of the child gets the credit.

Fact: Assuming both parties to the dispute meet all requirements for claiming the child, the tie-breaker rules favor the claimant as follows:

1. 1. 1. The parents, if they file a joint return;
      2. The parent, if only one of the persons is the child’s parent;
      3. The parent with whom the child lived the longest during the tax year, if two of the persons are the child’s parent and they do not file a joint return together;
      4. The parent with the highest AGI if the child lived with each parent for the same amount of time during the tax years, and they do not file a joint return together;
      5. The person with the highest AGI, if no parent can claim the child as a qualifying child.

Court-ordered custody doesn’t enter into it.

Preface: “By failing to prepare, you are preparing to fail.” — Benjamin Franklin

Tax Highlights to Help You Prepare for 2025 Tax Filing 

The One Big Beautiful Bill Act of 2025 (OBBBA) ushers in a new tax environment whose full effects will take several years to unfold and will likely require further clarification. Please join us now as we review some of the updated numbers for 2025 and some of the structural changes introduced by this sweeping legislation.  

Standard Deduction 

The standard deduction has increased for 2025 as follows: 

• • Joint filers – $31,500 
  • Individual taxpayers – $15,750 
  • Heads of household – $23,625 

An additional amount of $1,600 is added to the standard deduction of a taxpayer who is age 65 or older or who is blind. The additional amount is $2,000 if the taxpayer is unmarried and not a surviving spouse. If you are age 65 or older and blind, you get to take the additional amount twice. 

Income Tax brackets 

Income tax brackets for 2025 are as follows: 

Single	Married Filing Jointly	Rate
$0 – $11,925	$0 – $23,850	10%
$11,926 – $48,475	$23,851 – $96,950	12%
$48,476 – $103,350	$96,951 – $206,700	22%
$103,351 – $197,300	$206,701 – $394,600	24%
$197,301 – $250,525	$394,601 – $501,050	32%
$250,526 – $626,350	$501,051 – $751,600	35%
$626,351 and up	$751,601 and up	37%

Note that these brackets apply to taxable income after all deductions have been taken. The rates apply in a graduated manner, up to each threshold at the applicable rate, and from that threshold at the next applicable rate, etc. 

Changes to Itemized Deductions 

SALT

The biggest single change to itemized deductions is that the cap on the state and local tax (SALT) deduction has been increased to $40,000. This increase will expire after 2028, and absent additional legislation, the cap will then revert to $10,000. 

Another new wrinkle in the SALT deduction is that the increased cap has a phaseout threshold for high earners. For both single filers and married filing jointly, the phaseout begins at modified AGI of $500,000. The cap phases down from $40,000. At modified AGI of $600,000 or more, the cap is again $10,000. 

Mortgage Interest 

OBBBA reintroduces the deductibility of mortgage insurance premiums, which had been disallowed in recent years. The indebtedness limit of $750,000 for mortgage interest deductions remains unchanged. 

OBBBA makes no changes to deductibility of medical expenses. These are still limited to the amount that exceeds 7.5% of AGI. 

The itemized deduction for personal casualty loss has been broadened to include casualty loss due to state as well as federally-declared disasters. 

Other miscellaneous itemized deductions are now permanently eliminated. 

Changes Coming to Charitable Contribution Deductions in 2026 

Starting in 2026, there will be a lower-bound or “floor” on charitable deductions equal to 0.5% of AGI. The itemized charitable deduction will be reduced by this amount. 

Also starting in 2026, a new non-itemized charitable deduction will be available as a below-the-line deduction. Unlike the four other new below-the-line deductions introduced in the OBBBA, the charitable deduction will be permanent. It will not expire after 2028. 

The non-itemized deduction will be capped at $1,000 for single filers and at $2,000 for joint filers. It is obviously intended for non-itemizers. Unlike the itemized version, the non-itemized version will be restricted to donations by cash or check. It will not be subject to the new 0.5% “floor”. 

 

The Four “No Tax On…” Below-the-Line Deductions 

Under OBBBA, you are still required to report tips, overtime pay, and social security as taxable income. However, there are three new deductions that may reduce or eliminate the taxable amount. There is also a new deduction for car loan interest. All four deductions are subject to dollar amount caps, income-based phaseouts, and additional restrictions. All four will expire after 2028. 

1. Tips

The deduction for tips is capped at $25,000 regardless of filing status. It begins to phase out at $150,000 of modified AGI for single filers and at $300,000 for married filing jointly. 

The IRS has published a list of “tipped occupation codes” they consider valid for purposes of this deduction: https://shorturl.at/k1Gi2. The list does not include artists, musicians, entertainers, or accountants, or any other specified service trades or businesses (SSTBs). 

Sole proprietors may not deduct more in tips than their net income from the business through which the tips were earned. 

 2. OT Pay

The deduction for overtime pay is capped at $25,000 for joint filers, regardless of which spouse had the overtime pay. It is capped at $12,500 for single filers. It begins to phase out at $150,000 of modified AGI for single filers and at $300,000 for married filing jointly. 

This deduction is taken on the “and a half” portion of “time and a half” pay. In other words, if you had $1,500 in overtime pay for work that would have earned you $1,000 during non-overtime hours, then you would deduct the extra $500. The amount of overtime an employee can deduct should be reported by the employer. 

3. Seniors

The deduction for social security is not in any way capped by the amount of social security benefits the taxpayer actually received during the year. It is available to all filers age 65 and older and has a maximum value of $6,000 per person. It begins to phase out at $75,000 of modified AGI for single filers and at $150,000 for married filing jointly. 

Note that this deduction is taken in addition to the increased standard deduction for taxpayers aged 65 and older. 

4. Car Loan Interest

There is also a new deduction on car loan interest. It is capped at $10,000. It begins to phase out at $100,000 of modified AGI for single filers and at $200,000 for married filing jointly. 

This deduction applies only to car loans taken out after December 31, 2024. The vehicle must be new, assembled in the U.S., and cannot have a GVW of more than 14,000 lbs. The deduction cannot be taken for vehicles used for business or bought for resale. 

All four of these deductions are below-the-line deductions, meaning they are taken after AGI is computed. All four will expire after 2028 if not extended by Congress. 

Changes to the Qualified Business Income Deduction 

The Tax Cuts and Jobs Act of 2017 (TCJA) cut corporate income tax to 21%. In order to compensate unincorporated businesses, TCJA introduced the qualified business income deduction (QBID). The QBID is a below-the-line deduction worth a maximum of 20% of business income, subject to certain restrictions. 

While the corporate tax rate cut was permanent in TCJA, the QBID was set to expire in 2025. The OBBBA now makes the QBID permanent as well. 

The general structure of the QBID remains as before. For 2025, the phaseout thresholds for higher earners begin at $197,300 for single filers and $394,600 for joint filers. Above these thresholds, the amount of QBID begins to phase out for specified service trades or businesses (SSTBs). For non-SSTBs, the amount of QBID begins to be limited by wage and property requirements. 

The upper threshold for the phaseout is $272,300 of taxable income for single filers and $544,600 for joint filers. Above these thresholds, SSTBs can no longer take any QBID. Non-SSTBs must fully meet wage expense and property investment requirements to continue taking the full 20% deduction. 

As before, QBID for all earners is limited to the taxpayer’s taxable income minus net capital gains. 

One change that OBBBA introduces to QBID is a $400 guaranteed minimum deduction to any taxpayer who has at least $1,000 in qualified business income so long as the business income is “active”. The definition of “active” for this purpose should follow “material participation” as defined for distinguishing passive from non-passive business activity. This guaranteed minimum amount applies if the aggregate of all your active qualified business income is at least $1,000. 

Capital Gain Tax Rates 

Tax on long-term capital gains and qualified dividends for 2025 is as follows: 

Single	Married Filing Jointly	Rate
$0 – $48,350	$0 – $96,700	0%
$48,351 – $533,400	$96,701 – $600,050	15%
$533,401 or more	$600,051 or more	20%

Note that these rates apply in a graduated manner to all your taxable income. So, for instance, if you are single and have $40,000 of taxable income before considering capital gains and qualified dividends, then only the first $8,350 of your long-term capital gains qualify for the zero rate. 

Net Investment Income Tax 

In accordance with the Affordable Care Act of 2010, the 3.8% net investment income tax (NIIT) continues to apply to income from capital gains, dividends, interest income, royalty , and rental income. The amount of income subject to NIIT is the lesser of: 

• • Total investment income as defined above or 
  • Modified AGI in excess of $200,000 for single filers and $250,000 for joint filers. 

The NIIT is then added to your total tax.  

Dependent Credits 

The child tax credit has been increased to $2,200 for each qualifying child who was under the age of 17 at the end of 2025. The refundable portion of the credit remains at $1,700. 

The credit for other dependents remains $500 for each qualifying child who was 17 or 18 years old the end of 2025 or was a student not yet of age 24 at the end of that year, or was of any age but permanently and totally disabled. None of the credit for other dependents is refundable. 

This $500 credit is also available for qualifying relatives whose gross income was less than $5,250 in 2025. Note that a qualifying child can earn more than this and still be claimed as a dependent. 

Both the child tax credit and the credit for other dependents begin to phase out for taxpayers whose AGI is greater than $200,000 ($400,000 for married filing jointly).  

Adoption Credit 

For 2025, the adoption credit is available for up to $17,280 of qualified expenses. For a special-needs adoption, the maximum credit may be taken even if the actual costs were less. The credit begins to phase out for taxpayers with modified AGI above $259,190 and is completely phased out at $299,190. 

Under OBBBA, $5,000 of this credit is now refundable.  

Gift and Estate Taxes 

The annual gift tax exclusion for 2025 has increased to $19,000 per taxpayer. So, an individual can give up to $19,000 ($38,000 with spouse) to each child, grandchild or any other taxpayer in 2025 without being required to file a gift tax return. 

The lifetime estate and gift tax exemption for 2025 has increased to $15 million per individual.  

Mileage Rates 

The 2025 mileage rate for business purposes has increased to 70¢ per mile. 

The rate for miles driven in service of charitable organizations remains unchanged at 14¢ per mile. The rate for military moving expenses and for medical transportation is 21¢ per mile.  

Energy Credits 

One of the major effects of the OBBBA is to rapidly phase out many generous energy credits provided by the Inflation Reduction Act of 2022. These credits were originally supposed to be available until the 2030s, but most will now expire much sooner. 

The clean vehicle credit can still be claimed for 2025, but only for qualifying vehicles purchased by the end of September 2025. 

The energy efficient home improvement credit and residential clean energy credit are available through the end of 2025. In the past, unused portions of these credits could be carried forward to future years. It is not yet clear if this will still be possible for portions that re0main unused after 2025. 

For a business to claim business credit for wind or solar property, the property must either begin construction before July 5, 2026, or be placed in service by December 31, 2027. Business credit for energy storage, hydropower, and geothermal will not phase out until 2033. 

OBBBA also restricts these business credits if they are generated by either a “specified foreign entity” or a “foreign influenced entity.” 

Research and Experimental Expenses 

Under OBBBA, 100% of domestic research and experimental costs may now be expensed. Unamortized R&E expenditures remaining from tax years 2022-2024 may be amortized in 2025 or ratably over 2025 and 2026. 

Foreign R&E expenditures must still be amortized over 15 years. 

Depreciable Property 

Under OBBBA, bonus depreciation is permanently restored to 100%. 

The maximum Section 179 deduction is increased to $2.5 million and begins to phase out at $4 million of eligible property placed in service in 2025. 

Most amazingly of all, OBBBA now allows 100% expensing of some real property. There are, of course, a number of requirements and restrictions. Most importantly, the property must be used for production, manufacturing, or refining activities. The activity must be performed by the owner, so lessors are not eligible. This provision is set to expire after 2028.  

Digital Assets 

All taxpayers must state on Form 1040 whether they received, sold, or otherwise exchanged any digital assets during the year. This includes cryptocurrency, stablecoin, non-fungible tokens, and other digital assets. This question is informational and is independent from the requirement to report gains or losses from actual sales. Digital assets are taxed much the same as stocks and other capital assets. 

The IRS has now finalized Form 1099-DA to report sales and exchanges of digital assets. For 2025, brokers are required to report gross proceeds of digital asset transactions. Starting in 2026, they will be required to report the basis for covered securities.  

Forms 1099 

Under OBBBA, the threshold for filing Form 1099-K (payment card and third-party network transactions) is restored to $20,000 and 200 transactions, effective 2025. 

The threshold for filing Forms 1099-NEC and 1099-MISC will be increased to $2,000, but only in 2026. 

Preface: “Therefore shall a man leave his father and his mother, and shall cleave unto his wife: and they shall be one flesh.” – Genesis 2:24

Income Tax for Married People

Your marital status has a profound effect on how the government taxes you. If you have recently gotten married or ended your marriage or have become widowed, it is to your benefit to understand the changes this has on your tax situation.

This post addresses tax considerations specific to people who are married. Being married not only means different tax treatment than being unmarried, it also means it is greatly to your advantage to coordinate your tax planning with your spouse. This is true even if you were married only recently and even if you are filing separate tax returns.

Choosing the Right Filing Status

In the United States, how you are treated for income tax purposes is greatly affected by the filing status you choose on your tax return. As of 2025, there are five possible filing statuses:

• • • Single
    • Married filing jointly
    • Married filing separately
    • Head of household
    • Qualifying surviving spouse

Your choice of filing status determines your standard deduction, your tax rates, and what other deductions and credits you are eligible for. Before you select your status, you should make sure that you meet its requirements.

Married people must in general choose either the “married filing jointly” or “married filing separately” status. Married people who have not finalized all legal proceedings to terminate their marriage by the end of the year cannot choose “single” filing status for that year.

If you were married at any point during the year and have not finalized the ending of your marriage before midnight December 31, you are considered to have been married for tax purposes for that year. Even if your final end of marriage papers go through in the wee hours before sunrise of January 1, you are still married for tax purposes for the year just ended. However, if the end of the marriage is finalized at 11:59PM on December 31, you are considered unmarried for that year.

Death of a spouse is treated very differently than the willful termination of a marriage between living people. If your spouse died at any time in the year, even on January 1, for tax purposes you are still considered married for that year and can file jointly with your spouse who passed away that year. If you remarry before the end of the year, you can file jointly with your new spouse.

You may only file one tax return per year and you must choose only one filing status per year. If you are widowed or have chosen to end your marriage and you then remarry in the same year, you cannot file both with your old spouse and your new spouse.

In some cases, a married person may be able to claim “head of household” filing status. To do this, you must first be able to claim a child you provided for as a dependent. In addition you must either:

• • • Be legally separated from your spouse according to the laws of your state. Pennsylvania residents, please be aware that there is no legal separation status in Pennsylvania. Or,
    • Not have lived with your spouse at any time during the last six months of the year.

Claiming Dependents While Married

You do not have to be married to claim a qualifying child or qualifying relative as a dependent. If you are married, you cannot claim your spouse as a dependent. The tax break you get for being married is being able to choose the “married filing jointly” filing status which has a higher standard deduction and lower tax rates. But your spouse is not your dependent on a joint return. This is true even if you had much more income than your spouse or if your spouse had no income at all.

If you are married and filing jointly, any dependent that you or spouse could claim separately can be claimed on your joint return.

If you file separately and there are dependents you and your spouse could both claim, you must decide which one of you is claiming which dependent. If you both try to claim the same dependent in the same year, the IRS will launch an investigation to see who gets the credit and your refund will be delayed until they have made their determination.

Jointly vs. Separately, Which Is Better?

Most married people are better off filing jointly in most years. Married couples who file separately usually do so for personal rather than financial reasons.

If you file jointly, you must include all income earned by both spouses on the joint return.

If you file separately, you need report only your own income. This means that you and your spouse will not need to share financial information, which some people consider an advantage. However, it is still advisable to coordinate your tax position with your spouse.

Note that if one spouse chooses to itemize deductions, the IRS will not allow either spouse to take the standard deduction. So if you are filing separately, it is advisable to ask if your spouse is itemizing.

As already mentioned, the same dependent cannot be claimed on more than one return. So if you are filing separately and claiming dependents, make sure your spouse is not claiming any of the same dependents you are.

Once you file a joint return, neither spouse can file a separate return for that year.

However, this will not affect your filings for future years. For as long as you are married, you may choose to file jointly or separately for any given year regardless of how you filed previous years.

Most state income tax returns offer a choice between joint and separate filing status similar to that on the federal return. Your choice on your state return need not match the choice you make on your federal return.

There are four major disadvantages to filing separately:

• • • If you are hiring someone to prepare your tax returns for you, you will pay double or close to double in preparation fees since you are paying for two separate filings. Note that the filing threshold for separate filers is $5. Yes, that’s five dollars, which is a much lower threshold than for single filers. This means that if one spouse is filing separately, the other spouse is required to file even with only $5 of income.
    • You will be subject to higher income tax rates. For 2025, joint filers will jump from the 12% to 22% tax bracket at $96,950 of combined taxable income. For separate filers, this cutoff will be at $48,475, the same as for single filers.
    • You will take a lower standard deduction. For 2024, the standard deduction for joint filers is $31,500. For separate filers it is $15,750, the same as for single filers.
    • You and your spouse will automatically be ineligible for a number of deductions and credits including earned income credit, tuition credit, child and dependent care credit, adoption credit, and the student loan interest deduction. It is also likely that more of your social security benefit will be subject to taxation. And a non-working or low-earning spouse may no longer be able to contribute the full amount to an IRA.

Devising scenarios where there is a clear tax advantage to filing separately is something of an academic exercise for accountants. Here are a few possible financial advantages to filing separately:

• • • If both spouses are itemizing deductions and one spouse has low income and high medical expenses and the other spouse has high income and low medical expenses, then the spouse with the low income and high medical expenses will be able to take a bigger medical deduction filing separately. This is because deductible medical expenses are limited to the amount over 7.5% of adjusted gross income reported on the return.
    • For relatively high earners who are just above the phaseout threshold for certain credits and deductions that are not prohibited to separate filers, they may still be able to claim them by filing separately. For instance, the child tax credit begins to phase out at $400,000 for joint filers but only $200,000 for separate filers. Imagine a couple where one spouse earned just over $300,000 and the other earned just over $100,000. If they file jointly, their credit is limited. If they file separately, the lower-earning spouse can still claim the full credit.
    • If both spouses are very high earners, filing separately may allow them a lower rate of income tax. For example, at 2025 rates, spouses with taxable income of $600,000 each will be in the 35% bracket filing separately but in the 37% bracket filing jointly. Earners in the very highest brackets are phased out of most credits and deductions anyway and likely are not taking the standard deduction and in general the disadvantages of filing separately will mean less to them.
    • Consider also that in some cases filing separately may help you qualify for non-tax-related services or products such as financial aid or loans. Any third party that uses your tax return to determine if you are eligible will not be able to see your spouse’s income if you filed separately.

Injured Spouse Allocation of Refund

One consideration that should not be a reason to file separately is a fear that if you file jointly your refund will be taken away to pay your spouse’s debts. You can claim your share of any refund by filing Form 8379: Injured Spouse Allocation. This form is almost like a separate filing in miniature that allows you to compute and claim your share of the refund, but without losing access to any of the credits or deductions that would be disallowed if you actually filed separately. Form 8379 may be included with your joint return or filed up to three years later to request your portion of a refund that has been withheld to pay off debts due to your spouse.

Innocent Spouse Relief

If you filed a joint return and are later subject to additional taxes and penalties because your spouse intentionally misstated income, you may request a waiver from your portion of these additional taxes and penalties by filing Form 8857: Request for Innocent Spouse Relief.