Taxation of SS

[Spock]

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Originally Posted by gerntz FICA payments aren't taxes. They're insurance.

If its collected under threat of arrest and imprisonment, its "insurance" in name only and a convoluted definition of the term.

[Tiger8693]

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Originally Posted by gerntz Regardless of the money's purpose, it's a pretty amazing thing to say you're for a 6.2% tax rate increase above $132K salary plus the same on employer for daring to pay above that amount. Now there's a real job and economy killer. Net, your position is noting but political. Raising retirement age is much simpler.

Again, trying to avoid the political, just stating my concern and proposal for ensuring continued SS. Like it or not, SS is redistribution, to ensure our country provides at least some "security" for those that are.... less fortunate, or less responsible, whichever way you look at it.

Back to my intent of the thread, I am looking at some conversion where possible, and just plain buildup of after tax savings. Might be able to help things with that, at least until RMD's kick in.

[marko]

I'm confused.
If we're talking about paying tax on one's SS benefit, I'm having a hard time getting worked up about paying taxes on SS income as it is:
1) generally a very small percentage of the income most of us here take in,
2) only taxed on 85% of it and,
3) in many cases, there's no state tax.
"Free" money? Ok! Oh, I have to pay a bit of tax on it? OK!

If we're talking about FICA, well, no fighting that one! I was a high-income earner but, as much as I hate paying taxes, would have had no problem with making the cap open ended. It was taken Jan 1 and I never missed it, until late February when I'd get extra money in my check, having reached the cap.

The first case reminds me of when I got my first luxury company car. Someone said: "Don't get too happy, you're going to have to pay taxes on that lease payment".
I said: "So, I get to drive an $80,000 car, with gas and insurance and it's going to cost me, $2K in taxes?...OK"

[Tiger8693]

Quote:

Originally Posted by marko I'm confused. If we're talking about paying tax on one's SS benefit, I'm having a hard time getting worked up about paying taxes on SS income as it is: 1) generally a very small percentage of the income most of us here take in

Early on, its less than 20% of retirement income, later, it is close to 50% of retirement income (for DW and I).

If it sounds like I am whining about having to pay tax on "free money", sorry. Just fretting on the impact to our disposable income in retirement.

[gauss]

If you just found this out, I can understand your reaction.

It was quite an epiphany to me when I realized that anger/hurt are often the results of when something didn't go as planned and an element of unexpected surprise is involved.

I know I had that feeling when my pension accruals were terminated after ~ 20 years while at Megacorp.

This is often the case with personal relations with others too.

-gauss

[Tiger8693]

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Originally Posted by gauss If you just found this out, I can understand your reaction.

I had heard about it, but really didn't know the depth of it until I started to research it.

[marko]

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Originally Posted by Tiger8693 Early on, its less than 20% of retirement income, later, it is close to 50% of retirement income (for DW and I). If it sounds like I am whining about having to pay tax on "free money", sorry. Just fretting on the impact to our disposable income in retirement.

Respectfully, we all pay taxes on all sorts of things. Car registrations, food tax, meal tax, boat tax, parking meters; they all take a bite out of our income.

There's all kinds of things that are taxed that maybe shouldn't be--I'm not quite sure what my town's additional meal tax is for--but they are.

If SS being taxed was a surprise, I'm sorry you got blindsided.

In my case I was surprised that it was only partially taxed and that my state didn't tax it at all.

[Tiger8693]

Quote:

Originally Posted by marko Respectfully, we all pay taxes on all sorts of things. Car registrations, food tax, meal tax, boat tax, parking meters; they all take a bite out of our income. There's all kinds of things that are taxed that maybe shouldn't be--I'm not quite sure what my town's additional meal tax is for--but they are. If SS being taxed was a surprise, I'm sorry you got blindsided. In my case I was surprised that it was only partially taxed and that my state didn't tax it at all.

Fair enough. You make some good points I didn't really think about.

[joeea]

Quote:

Originally Posted by gauss Someone please correct me if I am wrong, but aren't employer contributions to SS paid with pre-tax dollars (for the employer). If true, at least 1/2 of SS payments should be taxable to the recipient if it is treated like any other investment. Any "growth" in your SS would also be taxable so the ratio should be above 50%.

You are correct.

And that's exactly the reasoning behind the 85%.

[joeea]

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Originally Posted by pb4uski I'm not sure why anyone would think that SS retirement benefits should be tax-free.

Because they used to be tax free.

[haha]

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Originally Posted by Tiger8693 It really stinks about taxation of SS.

Can you tell me why SS taxation is any worse than any other income taxation? To me it is better, in that it is slightly less than tax on other income, and if income is very low, much less.

Ha

[Tiger8693]

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Originally Posted by haha Can you tell me why SS taxation is any worse than any other income taxation? To me it is better, in that it is slightly less than tax on other income, and if income is very low, much less. Ha

No, I can't. I just don't like it now that I have calculated it.

It's not like i am saying I am not going to pay it, lighten up everybody!

[scrabbler1]

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Originally Posted by VanWinkle The brkts for SS taxation have never been inflation adjusted. That is the main problem I see in the current system.

I would be fine with greater taxation of SS benefits (% rate) as long as the tax brackets were indexed just like all the other income tax brackets.

Some SS recipients at the low end would have some room in the SD so that they wouldn't be taxed much more, if any.

[Gumby]

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Originally Posted by pb4uski Tiger, I disagree. I'm not sure why anyone would think that SS retirement benefits should be tax-free. There are numerous parallels of after tax retirement contributions that are later substantially taxed. The closest one to SS would be annual investments into a deferred annuity that was then annuitized for life at age 62 or 66 or 70... a large portion of the annuity benefits received would be taxable. Same thing for a non-deductible IRA. Let's say that you invested $5,000 annually in a non-deductible IRA from age 25 to 65. At a 7% average annual return, at age 65 you would have about $1 million on $200,000 of contributions. If you the converted that to a life annuity, you would receive about $64k a year in benefits. Your basis would be about $9k... your $200k of contributions divided by 22 year remaining life according to the IRS annuity tables. So $55k of the $64k in benefits would be taxed... that's 86%. Another example... take your FRA SS retirement benefit and annualize it. Then divide the annual amount by 4% to get the dollar amount needed to provide that annual benefit under the 4% rule. The take your SS contributions from page 3 of your SS statement and divided it by the dollar amount computed above... I get 15% for me... meaning that ~15% of what I receive is a return of the taxes that I paid and the other 85% relates to taxes paid by my employers (that I was never taxed on) and growth (that I was never taxed on).... so I have no reason to object to 85% of my SS being taxed.

An extremely good explanation.

[audreyh1]

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Originally Posted by Tiger8693 No, I can't. I just don't like it now that I have calculated it. It's not like i am saying I am not going to pay it, lighten up everybody!

Posters may be a little sensitive because of prior arguments over the fairness of taxing IRA withdrawals.

[RunningBum]

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Originally Posted by scrabbler1 I would be fine with greater taxation of SS benefits (% rate) as long as the tax brackets were indexed just like all the other income tax brackets. Some SS recipients at the low end would have some room in the SD so that they wouldn't be taxed much more, if any.

I'm not following. First off, lowest income people have 0% of SS taxed, then some have up to 50% tax with higher income, on up to 85% for highest income. And that income is then taxed like other taxable income, using the tax brackets. What other kind of indexing do you want on top of that? And btw, what is SD?

[rayvt]

[QUOTE=haha;2124513]Can you tell me why SS taxation is any worse than any other income taxation?/QUOTE]

Yes, I can.

Nominally, FICA is a payment into an account that will give you back the money when you are retired. FICA is after-tax. That is, you already paid income tax on that FICA money . Therefore the withdrawals (the SS benefit) should not be taxed, since you already paid tax on that money.

It's like having to pay income tax on money you withdraw from a bank account. "No, it is not income, it is just getting back some of my own money."

That's the rationale why SS income was not taxed. That changed in the 1985 tax law. Because the government wanted to collect more tax money.

That's the reasoning. Of course, we all know the truth: FICA is a tax that you pay the government. Period, the end.
SS (and Medicare) are welfare programs. Period, the end.

That the amount of money SS pays you is partially determined by how much FICA you paid is merely an interesting observation. In reality, the amount of your SS check is whatever the government decides it to be.

[rayvt]

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Originally Posted by audreyh1 Posters may be a little sensitive because of prior arguments over the fairness of taxing IRA withdrawals.

It is not fair, but that doesn't matter.

The government decides what the taxes are to be, and we have to pay them.

To paraphrase a Clint Eastwood character, "Fair'S Got Nothing To Do With It. "

[pb4uski]

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Originally Posted by rayvt Quote: Originally Posted by haha Can you tell me why SS taxation is any worse than any other income taxation? Yes, I can. Nominally, FICA is a payment into an account that will give you back the money when you are retired. FICA is after-tax. That is, you already paid income tax on that FICA money . Therefore the withdrawals (the SS benefit) should not be taxed, since you already paid tax on that money. It's like having to pay income tax on money you withdraw from a bank account. "No, it is not income, it is just getting back some of my own money." That's the rationale why SS income was not taxed. That changed in the 1985 tax law. Because the government wanted to collect more tax money. That's the reasoning. Of course, we all know the truth: FICA is a tax that you pay the government. Period, the end. SS (and Medicare) are welfare programs. Period, the end. That the amount of money SS pays you is partially determined by how much FICA you paid is merely an interesting observation. In reality, the amount of your SS check is whatever the government decides it to be.

^^^^ read post #8 and try again. Only about 15% of what you receive is a return of taxes that you paid.

On the last part, your benefits are based on your average indexed monthly earnings and since what you pay in tax is based on your earnings, it is fair to say that what you receive is based on what you paid in. The more you earned... the more you paid and the higher your benefit... but it isn't perfectly symmetrical because of the design of the bend points.

[scrabbler1]

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Originally Posted by RunningBum I'm not following. First off, lowest income people have 0% of SS taxed, then some have up to 50% tax with higher income, on up to 85% for highest income. And that income is then taxed like other taxable income, using the tax brackets. What other kind of indexing do you want on top of that? And btw, what is SD?

SS itself is indexed, so the unchanged (since 1993) brackets of $25k and $32k capture more and more income simply due to inflation. I think that $25k and $32k should rise a little bit each year the same way the regular tax brackets are indexed.

SD=Standard Deduction, or the 0% income bracket.