The tax on Social Security income is a blatant and unfair attack on senior citizens. While the GOP was cutting taxes sharply for the rich & businesses, seniors were left out. Worse. Many senior citizens now pay a higher marginal tax rate than do younger people making $165k.
Traditionally SS income was not taxed The income it comes from was already taxed while working For many, this is still true, if their SS benefits * outside income are low. When FDR introduced SS, taxing it wasn’t considered, as it was a means to get the elderly out of poverty.
The average SS benefit is $16K per person per year, or $28k per couple. Income (including SS benefits) above $32k per couple is taxable..When Congress added the tax of SS benefits in 1984, only 10% of seniors paid taxes on it.
But that base level, $32k, has never been adjusted for inflation. $32k in 1984, adjusted for the Consumer Price Index, would be worth $82K today. In 2017, 56% of all seniors were some paying taxes on their Social Security benefits.
The justification for taxing SS benefits is that most people eventually get back more than what they pay in. Men (with shorter average life spans), eventually receive in SS & Medicare benefits of averaging 21% more than they paid in, adjusted for inflation. For women, it is 34%.
Reasonable people could argue the merits of taxing wealthy person's SS benefits. But, under the new tax law, it can wipe out the standard or itemized deductions and make far more other income taxable, for seniors that are very far from wealthy.
Ironically, since the standard deduction has doubled to $25K for a married couple, most seniors would not pay taxes on the minimum required distributions from IRA’s and 401k’s. Were taxable income not boosted by taxable SS benefits, their net taxable income would be negative.
But note: The new tax law doubled the standard deduction. But it also eliminated the personal exemption, and capped many itemized deductions.
But the tax is not just on Social Security withdrawals. Outside income affects how much of the Social Security benefit is taxed. The biggest problem usually comes for those who have put money into IRAs and 401k’s. The income deposited into them is not taxed when earned.
Those deposits reduce taxable income when made. Therefore, all withdrawals later on are taxable. By itself, that would be fair. But no one can avoid for long these taxes by not withdrawing, because, at age 70.5, minimum withdrawals are mandatory.
Heaven forbid the government might allow seniors to escape paying taxes on IRA withdrawals. But it is actually a quadruple taxation: paying taxes on income already taxed, plus making other income taxable, which makes more of the SS benefits taxable.
None of this is new. But two things are. Because the minimum $32K was never adjusted for inflation, 56% of seniors today. An income of $32k is just now 155% of the federal poverty level. So now the tax is increasing affecting many more seniors of limited means.
And the percent of seniors paying taxes on their SS benefits will only increase.
The second thing that has changed is relative. Under the new tax law, younger married couples filing jointly pay a marginal rate of 12% for taxable income up to $77k, & then 25% up to $165K.The marginal taxes on Social Security income is 23.5%. FDR must be spinning in his grave.
That 23.5% rate on SS income continues until 85% of the benefit is taxed. That happens at around $56k in outside income. So, this can hardly be termed a millionaires’ tax. After that point, the taxes end, in general (not counting being pushed into a higher tax bracket).
Tax accountants’ best advice is to stop working, if you can afford to do so. Retire early & take early withdrawals from your IRA when you reach age 59.5. (Before then, you will face a penalty for early withdrawal.) Then take withdrawals before you begin getting SS income,
which you should delay as long as possible (though that means a higher benefits and thus higher Social Security taxes.) And do not return to work. After one begins receiving SS income, accountants suggest that you give the IRA withdrawals to charity, if you can.
If the best tax investment advice is to stop working early, delay receiving financial benefits & give the income to charity, you have made a very bad investment. IRAs & 401k’s are bad investments for those making above-average incomes, thanks to this wretched tax.
Congress cut taxes mainly for corporations & those with high incomes. But it left an increasing number of seniors paying taxes on money on which they paid taxes already. This constitutes a kind of quadruple taxation. And it is a blatant and unfair attack on senior citizens.
@threadreaderapp Unroll.
