SS Taxation (from the tax cut bill)

[Helena]

Mod note - these posts were moved from the tax bill thread to begin a new and separate discussion here.

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I wonder if either the House or the Senate bothered to address the decades old mess they made when they linked the tax on Social Security to an income that was not indexed for inflation, never increases due to inflation and is now a burden on low income seniors.

Speaking of inflation... both the House and Senate versions use Chained CPI for items that are indexed for inflation which means future inflation increases will be lower.

 

[audreyh1]

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I wonder if either the House or the Senate bothered to address the decades old mess they made when they linked the tax on Social Security to an income that was not indexed for inflation, never increases due to inflation and is now a burden on low income seniors.

Speaking of inflation... both the House and Senate versions use Chained CPI for items that are indexed for inflation which means future inflation increases will be lower.

I think that answered your question. They would like slower inflation adjustments and probably very happy with other thresholds not being indexed.

 

[aja8888]

I think that answered your question. They would like slower inflation adjustments and probably very happy with other thresholds not being indexed.

I think us seniors that are paying ordinary income tax on 85% of a benefit threshold that was not indexed for inflation is the issue. It sucks after paying into it heavily for 4+ decades. None of the seniors I know that pay the tax are happy.

 

[audreyh1]

I think us seniors that are paying ordinary income tax on 85% of a benefit threshold that was not indexed for inflation is the issue. It sucks after paying into it heavily for 4+ decades. None of the seniors I know that pay the tax are happy.

Definitely many folks have moved past the threshold due to inflation.

I just think the “trend” right now is against correcting for things like that.

 

[pb4uski]

If you had made contributons of after-tax money to a contributory pension plan for 40 years and started receiving benefits a large percentage of those benefits would be taxable... same difference... just like if you made non-deductible contributions into an IRA and started withdrawals a large portion of those withdrawals would be taxable.... same thing.

 

[foxfirev5]

If you had made contributons of after-tax money to a contributory pension plan for 40 years and started receiving benefits a large percentage of those benefits would be taxable... same difference... just like if you made non-deductible contributions into an IRA and started withdrawals a large portion of those withdrawals would be taxable.... same thing.

Not exactly. SS was originally tax free. Then 35 years ago a nonindexed income number was picked for taxation. In effect this has gradually eroded the net benefit. I get your point but its a little apples and oranges IMHO. However it is a good indicator of what can be done to address the ss issue.

 

[pb4uski]

While SS was originally tax free the point is that it should not have been comparing SS to similar contributory retirement instruments where contributions are after-tax money where one is taxed on growth but not on return of contributions... and 85% is about right though I concede that we got to a sensible result in an odd way.

 

[gerntz]

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I wonder if either the House or the Senate bothered to address the decades old mess they made when they linked the tax on Social Security to an income that was not indexed for inflation, never increases due to inflation and is now a burden on low income seniors.

I don't understand this/what it is referring to. Please explain. Thanks.

 

[gerntz]

If you had made contributons of after-tax money to a contributory pension plan for 40 years and started receiving benefits a large percentage of those benefits would be taxable... same difference... just like if you made non-deductible contributions into an IRA and started withdrawals a large portion of those withdrawals would be taxable.... same thing.

I understand it, all the benefit payments for both are fully income taxable. Only thing that isn't is the return of the after-tax contributions which are not really a benefit.

 

[pb4uski]

Not sure what your point is but I guess one could argue that any return of contributions is not a benefit but a return of your own money whether the contributions were tax deductible or not.

 

[marko]

I wonder if either the House or the Senate bothered to address the decades old mess they made when they linked the tax on Social Security to an income that was not indexed for inflation, never increases due to inflation and is now a burden on low income seniors.

You're assuming that wasn't the plan from the beginning. I don't know either way but it's possible.

 

[Independent]

I don't understand this/what it is referring to. Please explain. Thanks.

It's badly worded.

The $32,000, $25,000, $12,000, and $9,000 on this worksheet are not indexed for inflation https://taxmap.irs.gov/taxmap/pubs/p915-005.htm#en_us_publink1000263043

The result is that for some people with SS benefits growing with inflation, and other income that's growing with inflation, the fraction of their SS benefit which is taxable grows (where you might think that fraction should be constant).

Other people have already hit the cap where 85% of their benefits are taxable, so this indexing issue doesn't impact them.

 

[Chuckanut]

The result is that for some people with SS benefits growing with inflation, and other income that's growing with inflation, the fraction of their SS benefit which is taxable grows (where you might think that fraction should be constant).

Sounds like part of a plan to fix the SS funding problem.

 

[Independent]

Sounds like part of a plan to fix the SS funding problem.

You are substantially correct. The taxes raised by the first 50% are credited to the SS Trust Fund. So, from a SS funding perspective, this is exactly like a benefit cut.

However, the taxes raised by the additional 35% go to the Medicare Trust Fund.

Nice history here: https://www.ssa.gov/history/taxationofbenefits.html

 

[foxfirev5]

We can debate the details, but in any event we're not going to get what was promised back in the day. Taking it at 62 and dealing with it as we go

 

[pb4uski]

Disgree.... putting aside any potential haircut in 2034 you are going to get what was promised back in the day. However, more of what you get might be subject to tax.

Think of it as a success tax.... if you were less successful they you would not be taxed as much.

In fact, if you didn't have all those extra assets and savings and income then most likely a lot less of your SS woud be taxable... if it makes you feel better give those extra assets away and you'll get the deal you were expecting and be happier.

 

[gerntz]

It's badly worded.

The $32,000, $25,000, $12,000, and $9,000 on this worksheet are not indexed for inflation https://taxmap.irs.gov/taxmap/pubs/p915-005.htm#en_us_publink1000263043

The result is that for some people with SS benefits growing with inflation, and other income that's growing with inflation, the fraction of their SS benefit which is taxable grows (where you might think that fraction should be constant).

Other people have already hit the cap where 85% of their benefits are taxable, so this indexing issue doesn't impact them.

Dang!! Thanks. Still complicated.

 

[foxfirev5]

Disgree.... putting aside any potential haircut in 2034 you are going to get what was promised back in the day. However, more of what you get might be subject to tax.

Think of it as a success tax.... if you were less successful they you would not be taxed as much.

In fact, if you didn't have all those extra assets and savings and income then most likely a lot less of your SS woud be taxable... if it makes you feel better give those extra assets away and you'll get the deal you were expecting and be happier.

Taking away a dollar in benefits or adding a dollar of taxes is the same to me.

 

[Independent]

Taking away a dollar in benefits or adding a dollar of taxes is the same to me.

I'm not sure what tax treatment you were expecting "back in the day".

The current tax rules were passed 24 years ago.

When I was doing retirement planning, I figured that 85% of my SS benefit would be included in AGI, because I figured inflation would erode the brackets in the formula. Seems like a reasonable assumption.

 

[pb4uski]

Taking away a dollar in benefits or adding a dollar of taxes is the same to me.

The changes that you refer to that tax social security benefits were put in place in 1983 (50%) and 1993 (increased from 50% to 85%).... I would have thought that you would have had sufficient time to internalize the change by now without lamenting that we are not getting what we were promised "back in the day" when you are getting what you were promised but rather than being tax-free (which it really shouldn't have been to begin with) it is now taxed like other similar contributory retirement plans.

WADR, it seems like a pretty petty indignation to me.

 

[foxfirev5]

I was simply stating an opinion. I don't see how you have the ability to assess my happiness or indignation. The point I was trying to make was that the rules and assumptions have changed in the past and probably will in the future. Thanks

 

[pb4uski]

Through your written words.

 

[foxfirev5]

Always have to have the last word. Right?

 

[pb4uski]

No.

 

[Niuatoputapu]

Independent - thank you for the insights. Both links were educational.