SS Taxation (from the tax cut bill)

[Texas Proud]

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

The point being is it is not the same to everybody as everybody would not have a dollar less in benefits....

Doing a tax only hits the higher income people... you happen to be in that group...

 

[VanWinkle]

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 never really thought about it that way

but it does make some sense that before tax dollars are being taxed when taken out.

However paying tax on a "tax" seems a little underhanded to me.

VW

 

[pb4uski]

Nothing underhanded about it at all.

Let's say SS didn't exist. If you earn $100 you owe income tax on $100 of income... let's say that is $15... so you have $85 left and put $8 into a non-deductible IRA and have $77 left to spend... you can later take that $8 out and only get taxed on the growth.

SS is similar only it is mandatory... you earn $100, pay $15 of income tax and $8 of SS and have $77 left to spend... you can later get benefits based on having paid in that $8 but get taxed on the growth... that is part of why SS is only 85% taxable and not 100% taxable... the 15% is a straw-man for your return of contributions.

 

[aja8888]

SS is similar... you earn $100, pay $15 of income tax and $8 of SS and have $77 left to spend... you can later get benefits based on having paid in that $8 but get taxed on the growth... that is part of why SS is only 85% taxable and not 100% taxable... the 15% is a straw-man for your return of contributions.

What growth? SS goes in as dollars and comes out as dollars. It's not a mutual fund or other investment vehicle that you have control of.

 

[pb4uski]

The SS Trust Fund invests any excess of taxes collected over benefits paid in U.S. government bonds and receives interest on those investments... as of the end of 2016 the SS Trust Fund balance is ~$2.9 Trillion.

There has to be growth. If there was no growth then most recipients would receive everything that they paid in in about 0-5 years... I was a high earner and my contributions would be recovered in 3.9 years... DW was a low earner and her contributions would be recovered in about a year. Even if you also consider employer contributions (that you benefit from but never got taxed on by the way) it only doubles those terms.

Take your SS taxes paid divided by your monthly FRA benefit and you'll see that if you live to an average lifespan that you'll collect much more than you (or your employer) ever paid in.

 

[aja8888]

The SS Trust Fund invests any excess of taxes collected over benefits paid in U.S. government bonds and receives interest on those investments... as of the end of 2016 the SS Trust Fund balance is ~$2.9 Trillion.

There has to be growth. If there was no growth then most recipients would receive everything that they paid in in about 0-5 years... I was a high earner and my contributions would be recovered in 3.9 years... DW was a low earner and her contributiosn would be recovered in about a year. Take your SS taxes paid divided by your monthly FRA benefit and you'll see that if you live to an average lifespan that you'll collect much more than you (or your employer) ever paid in.

Growth of the fund is also increasing due to the increasing number of people in the workforce that are paying in and not collecting yet. Plus, the age of "full retirement" benefits has also increased, adding to the amount paid in and not collected.

 

[pb4uski]

I guess that I would thought that was obvious, and while your statement is correct.. the sign is backwards... benefits paid exceeded taxes collected by $66 billion in 2016... however, interest income of $87 billion in 2016 caused the fund to be $21 billion more at the end of 2016 than at the beginning of 2016.

https://www.ssa.gov/policy/docs/statcomps/supplement/2017/4a.pdf

 

[aja8888]

I guess that I would thought that was obvious, and while your statement is correct.. the sign is backwards... benefits paid exceeded taxes collected by $66 billion in 2016... however, interest income of $87 billion in 2016 caused the fund to be $21 billion more at the end of 2016 than at the beginning of 2016.

https://www.ssa.gov/policy/docs/statcomps/supplement/2017/4a.pdf

I guess then we need more people putting into the system to relieve the pressure on the gov to make it work for all of us. Or maybe just increase the tax rate (it is a flat tax, so to say) or cut benefits (some people call them entitlements) for us that have paid in for 40+ years.

 

[RetireAge50]

Take your SS taxes paid divided by your monthly FRA benefit and you'll see that if you live to an average lifespan that you'll collect much more than you (or your employer) ever paid in.

This is interesting you made me look. For my wife and I together (starting to collect at age 62) we recover our contributions after 6 years.

 

[CRLLS]

SS is not a retirement savings plan. The money in does not equate to money out plus any interest divided by life expectancy. There is a relationship, but it is not linear. Trying to justify taxing these benefits based on allocating some ratio of pre-tax dollars paid during our working years and some gains is futile IMO.

Further if SS was strictly a retirement plan (the OA in OASDI), there would be no spousal benefits, there would be no disability benefits, there would be no children's survivor benefits. Since the government has set the rules, we must abide by them. But that doesn't make it "right". My personal belief is that SS benefits should be received tax free without any regardless of any other income streams for everyone. It is silly for the SS to give us some $ and the IRS (sometimes) taking some of it back.

If the current tax bill was sold as a way to "simplify" our tax system, removing the tax on SS would remove the "some pay this tax, some pay that tax and some don't pay any taxes" calculations. That, or everyone get 100% of SS benefits taxable and increase the personal exemptions.

 

[pb4uski]

You are right in that social security is a bundle with aspects of life insurance (survivor benefits like DW and her mom and siblings when her dad died young in a plane crash or that my grandmother and her children received when my grandfather died young in an auto accident), disability income insurance and a retirement pension.

However, if you carve something out of the numerator for what you pay for the survivor and DI benefits, then it is an even shorter period until your retirement benefits exceed all that you have paid in... so it is an even better value and it is fair that you be taxed on amounts received in excess of your principal... and the 85% is a sensible strawman for what should be taxable.

I agree that you shouldn't be taxed on the return of your own money, but I just can understand the indignation of many that SS retirement benefits should be tax-free because it is "my" money other than a fairly broad lack of understanding that in many cases you get back much more than you pay in. Maybe if would be more accepted if retirement benefits equal to the first 90% of what you paid in was tax-free (with ~10% being the value of life and disability insurance) and everything above that was 100% taxable but I think in a lot of cases that might result in more than 85% being taxed.

 

[CRLLS]

pb4uski, I didn't mean to imply that I shouldn't be taxed on the return of my money. I was trying to say that it is not "my money" to start with. None of it, other than what the SSA has promised. Once deducted from my paycheck, it is theirs to do with as they (the laws) see fit. I do not consider SS benefits as a return of those deductions taken or any fraction thereof. The benefit paid out is based on a formula that neither you nor I had anything to do with defining. I am not indignant about any of that.

What makes no sense to me is for one part of the government to distribute money and then another department to take back some of it from some of us in taxes. And to complete the obfuscation circle, some portion of those taxes paid on the SS benefits are returned to the SS Trust Fund. No good comes of simply moving money back and forth. If this was in private business, it may be called money laundering. SS started out fairly simple. Now it is complex. There has to be a better, simpler way. Since this is a discussion on the Tax Bill, it would be a perfect time to simplify some of this, IMO.

 

[Texas Proud]

pb4uski, I didn't mean to imply that I shouldn't be taxed on the return of my money. I was trying to say that it is not "my money" to start with. None of it, other than what the SSA has promised. Once deducted from my paycheck, it is theirs to do with as they (the laws) see fit. I do not consider SS benefits as a return of those deductions taken or any fraction thereof. The benefit paid out is based on a formula that neither you nor I had anything to do with defining. I am not indignant about any of that.

What makes no sense to me is for one part of the government to distribute money and then another department to take back some of it from some of us in taxes. And to complete the obfuscation circle, some portion of those taxes paid on the SS benefits are returned to the SS Trust Fund. No good comes of simply moving money back and forth. If this was in private business, it may be called money laundering. SS started out fairly simple. Now it is complex. There has to be a better, simpler way. Since this is a discussion on the Tax Bill, it would be a perfect time to simplify some of this, IMO.

Why? I know they tax unemployment insurance payments.... IINM they also tax what the farmer get to not grow crops...

 

[pb4uski]

pb4uski, I didn't mean to imply that I shouldn't be taxed on the return of my money. I was trying to say that it is not "my money" to start with. None of it, other than what the SSA has promised. Once deducted from my paycheck, it is theirs to do with as they (the laws) see fit. I do not consider SS benefits as a return of those deductions taken or any fraction thereof. The benefit paid out is based on a formula that neither you nor I had anything to do with defining. I am not indignant about any of that.

What makes no sense to me is for one part of the government to distribute money and then another department to take back some of it from some of us in taxes. And to complete the obfuscation circle, some portion of those taxes paid on the SS benefits are returned to the SS Trust Fund. No good comes of simply moving money back and forth. If this was in private business, it may be called money laundering. SS started out fairly simple. Now it is complex. There has to be a better, simpler way. Since this is a discussion on the Tax Bill, it would be a perfect time to simplify some of this, IMO.

On the first part, I totally agree with you but my sense is that many people do not see it that way.... they see it more personally as "their money"... you can just sense that reading between the lines of some of the posts of people keen to start SS retirement benefits at age 62 so they can get "their money" back as soon as they can.

Any yes, I know that some of the taxes collected on SS taxable income loops back around to the SS trust fund and that part actually doesn't make much sense in many ways but I suspect that it was more politically palatable than increasing payroll taxes.

I actually don't see SS as being very complex at all.... it all boils down to we're going to take money out of your paycheck (or make you pay in if you are self employed)... if you die we'll provide certain benefits to your survivors... if you become disabled then we'll provide you with certain benefits and in addition if you live long we'll provider you with retirement benefits.... but if you live long and prosper, then some of your benefits will be taxed.... pretty simple.... then there are the mechanics of execution.

And I would love to see it simplified too but I just don't see that happening.

 

[CRLLS]

Why? I know they tax unemployment insurance payments.... IINM they also tax what the farmer get to not grow crops...

I really don't see the comparison. As I understand it, unemployment is collected and distributed at the state level with some backing at the Federal level. benefits vary depending on the state. It is not a federally operated system. In my ideal world, it would not be taxed at either the state or federal level.

As far as the farmers taxation goes, that program is not intended to supplement a loss of income like SS and unemployment are. It is to control the gross output of certain crops as I understand.

If I remember correctly, ACA premium subsidies are not considered taxable income. Why is that treated differently form other Fed programs? Is that because it goes directly to the insurance companies and not to the individual? I really don't see much difference in the intent of the programs. I'd gladly tell the SSA to pay my electric bill, my gas bill. my real estate taxes etc. if it weren't counted as income to me. That ain't gonna happen.

I actually don't see SS as being very complex at all.... it all boils down to we're going to take money out of your paycheck (or make you pay in if you are self employed)... if you die we'll provide certain benefits to your survivors... if you become disabled then we'll provide you with certain benefits and in addition if you live long we'll provider you with retirement benefits.... but if you live long and prosper, then some of your benefits will be taxed.... pretty simple.... then there are the mechanics of execution.

Ahhh.....Therein lies the primary problem in my eyes. The execution is the complexity and inequity!

Due to all of the other retirement programs in place such as IRA's, Roth's, 401k"s to name a few, one can manipulate those income streams to the point where their SS benefits are not taxed at all. Another person living the same lifestyle with the same retirement income, with the same SS benefit may be paying taxes on 85% of their SS benefit. i.e. The complexity becomes huge when working between all the other retirement plans/programs. To those people not willing, incapable or unable to optimize those variables, taxing some people's SS at multiple levels becomes complicated and an unfair policy.

Taxing SS benefits has unintended consequences. For me personally, those consequences make it complicated. And if it is complicated for me, I assume that there may be others who are also going thru that same "experience", probably more than a couple of people. in my mind, if SS was not taxed there would be no complexity.

 

[Montecfo]

This is interesting you made me look. For my wife and I together (starting to collect at age 62) we recover our contributions after 6 years.

It's kind of a false comparison don't you think? The government had your money all this time.

Since we don't get deductions going in, to me social security should not be taxable. I can see means testing via taxation above a threshold. In essence, that is what we have.

 

[pb4uski]

.....If I remember correctly, ACA premium subsidies are not considered taxable income. Why is that treated differently form other Fed programs? Is that because it goes directly to the insurance companies and not to the individual? ....

My guess is that ACA premium subsidies are not considered taxable income because they are calculated based on taxable income so it would become a circular formula and the IRS math is hard enough without adding such complexity.

It's kind of a false comparison don't you think? The government had your money all this time.

Since we don't get deductions going in, to me social security should not be taxable. I can see means testing via taxation above a threshold. In essence, that is what we have.

While it makes sense that your contributions to social security should not be taxable, why would one think that it should be 100% taxable. They have had your money all this time, have earned interest on it and each benefit payment is a combination of return of capital and your share of the interest.... and 15% is a strawman for the return of capital piece.

It is no different from a non-deductible IRA where contributions are after-tax money and the portion of your withdrawals representing your contributions are non-taxable but what you receive in excess of your contributions are taxed because they are growth that you have never been taxed on.... same thing with some contributory pension plans... and with SPIA benefits in a taxable account. TNSTAAFL.

And while I agree that we are limping toward means testing on some ways, that would be the worst thing for social security. You could have Sally Saver and Sue Spender who each earned the exact same money and made the same contributions to SS.... means testing means that the spender is rewarded and the saver is penalized... then it is a slippery slope to SS becoming just another welfare program.

 

[CRLLS]

My guess is that ACA premium subsidies are not considered taxable income because they are calculated based on taxable income so it would become a circular formula and the IRS math is hard enough without adding such complexity.

Thank you. Exactly my point about taxation of SS benefits.

 

[pb4uski]

You are mistaken ... SS benefits are not circular because the amount of SS benefits that you receive are not dependent on your income for the year.... they are based on a benefit formula.... OTOH ACA subsidies are based on your income for the year.

At certain levels of income how much of what you receive in SS that is include in income is dependent on other income, but not on SS income, so that isn't circular either.

 

[CRLLS]

If you look at purely SS, maybe you are right. But when you look at the whole picture in context, 50% of the SS benefits are part of the income used to determine if or how much is taxed. The more you get in SS benefits affects how much more you get taxed so the less you have after tax. The more you get taxed, the more goes back into the SS trust fund. Maybe not a never ending circle but it is circular by my definition.

 

[pb4uski]

Yeah... I guess we all need to find something to bitch about.

 

[USGrant1962]

If you look at purely SS, maybe you are right. But when you look at the whole picture in context, 50% of the SS benefits are part of the income used to determine if or how much is taxed. The more you get in SS benefits affects how much more you get taxed so the less you have after tax. The more you get taxed, the more goes back into the SS trust fund. Maybe not a never ending circle but it is circular by my definition.

That has nothing to do with a "circular formula". In your example, Ordinary Income + 50% of SS = taxable income. DONE

In pb's example:
Step 1 - determine taxable income
Step 2 - determine subsidy
Step 3 - subtract subsidy from taxable income to determine "revised" taxable income
Step 4 - determine "revised" subsidy for "revised" taxable income...
Step 3 again - Rinse/repeat.

But the real answer is that the ACA subsidies are in the form of tax credits, and tax credits are not taxable income.

 

[pb4uski]

Good point... as credits they are outside the tax calculation... but someone was suggesting that they be taxed which would make them circular by definition.

 

[Helena]

Ahhh.....Therein lies the primary problem in my eyes. The execution is the complexity and inequity!

Due to all of the other retirement programs in place such as IRA's, Roth's, 401k"s to name a few, one can manipulate those income streams to the point where their SS benefits are not taxed at all. Another person living the same lifestyle with the same retirement income, with the same SS benefit may be paying taxes on 85% of their SS benefit. i.e. The complexity becomes huge when working between all the other retirement plans/programs. To those people not willing, incapable or unable to optimize those variables, taxing some people's SS at multiple levels becomes complicated and an unfair policy.

Taxing SS benefits has unintended consequences. For me personally, those consequences make it complicated. And if it is complicated for me, I assume that there may be others who are also going thru that same "experience", probably more than a couple of people. in my mind, if SS was not taxed there would be no complexity.

This is what I do... micromanage my income so I stay below both the SS tax income and the IRS filing income. I can do this because I am single, totally out of debt [including my house] and can live comfortably on a low income. But when I get to the IRA RMD age, I'll have to tweak my strategy.

.

 

[Dave J]

This is what I do... micromanage my income so I stay below both the SS tax income and the IRS filing income. I can do this because I am single, totally out of debt [including my house] and can live comfortably on a low income. But when I get to the IRA RMD age, I'll have to tweak my strategy.

.

Depending on your IRA balance, you may or may not be wasting ability to pay a lower rate by(using todays brackets) not using the 10% bracket.If you have a lot of IRA assets and your RMD is high enough you "may" be forced to pay in the 15 or 25% brackets when you could have got some out at lower rates. Same with your state tax if you live in a state with state taxes.I have been micromanaging my income up to the top of the 10% bracket for a few years now, and still kick myself that I wasted a couple years by not paying any tax.YMMV