March 1, 2021
Originally Social Security benefits were treated as nontaxable income. That changed in 1983, as part of a larger plan to save the system from insolvency. On the theory that every employee had paid income taxes on his or her Social Security tax payments, but had not paid income taxes on the employer’s 50% share, one-half of Social Security benefits were made includable in income. To protect the lowest-income retirees, a base amount of income was exempted from the calculation. The exemption was set at $25,000 for singles, $32,000 for married couples filing jointly, but $0 for married couples filing separately. The exemption has never been adjusted for inflation.
Taxation of benefits was revisited by the Congress in 1993. This time the theory was that in private pensions and annuities 15% of payments received may be excluded from income tax as a return of principal, leaving 85% subject to tax. Accordingly, to create a similar result for Social Security the benefit inclusion was raised to 85%, but again only for higher-income retirees. The base exclusion amount this time was $34,000 for singles, $44,000 for marrieds filing jointly, and $0 for marrieds filing separately. These figures have also never been adjusted for inflation, so that over time more and more retirees are paying income taxes on some portion of their Social Security benefits.
Patrick Kelley, a Louisiana resident, was married to Gwendolyn. Before their marriage Mr. and Mrs. Kelley executed and recorded an agreement electing, under Louisiana law, a Separate Property Matrimonial Regime. That meant that they filed their federal income taxes separately. In 2014, when he received over $20,000 in Social Security benefits, Mr. Kelley did not report any of the benefits on his Form 1040. The IRS determined that 85% of Mr. Kelley’s benefits were taxable.
Mr. Kelley challenged this assessment in the Tax Court. He argued that the $0 exclusion due to his filing status was discriminatory, that it should be one-half of the amount available for joint filers, or $16,000, and that the unfairness was so extreme as to violate the Due Process clause of the Fourteenth Amendment. There was no rational basis, he believed, for making this distinction between classes of married persons.
The Tax Court was not sympathetic. Congress explained the reasoning behind the $0 exclusion thus: “If the base amount for these individuals were higher, couples who are otherwise subject to tax on their benefits and whose incomes are relatively equally divided would be able to reduce substantially the amount of benefits subject to tax by filing separate returns.”
That was a rational enough reason for the Court to rule against Mr. Kelley. The distinction is not so unfair or irrational as to be unconstitutional.
Just think of it as another marriage tax penalty for Mr. and Mrs. Kelley. Had they never married, they would have together had $50,000 worth of exclusion instead of $0.