Taxation of SS

[Tiger8693]

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]

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]

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]

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]

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

Because they used to be tax free.

 

[haha]

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]

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]

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]

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]

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]

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]

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]

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]

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]

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.

 

[marko]

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

I'm hoping the OP isn't thinking that the tax itself is 50% and not that 50% of the benefit is taxed at whatever bracket you're in.

My quick tax calc run of $20K X 2 in SS and a $50K IRA withdrawal shows a difference of $3300 if the $40K in SS wasn't there. (I did this at the Pat's half time so I could be off).

 

[pb4uski]

$50k of income before SS would put a MFJ couple in the 12% tax bracket, and another $40k of SS income would still be in the 12% tax bracket.

With SS: ($50k + ($40k * 85%)) - $24k std dedn = $60k TI = $6,819 in tax
Without SS: ($50k + [-]($40k * 85%)[/-]) - $24k std dedn = $26k TI = $2,739 in tax

Difference of $4,080 is ($40k * 85%)*12%.... net of 10.2% of SS received.

 

[rayvt]

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

Read the last sentence of post # 37 and try again.

"the amount of your SS check is whatever the government decides it to be."

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.

Yes. This is what the Federal Government has currently decided it will be.

They can change it whenever they want to. In fact, we already know that the SS benefit is slated to be cut by ~23% in about 16 years (2034) unless the current law is changed.

 

[gauss]

^ Rayvt, I have to agree with pb4uski on this one.

SS is taxed in a matter very consistent with all other investments.

Your argument that SS is all a return of after tax money is false. See my post #5 regarding this (tl;dr; summary employer portion was not after-tax and any growth was not after tax. You are not just getting your withholding back -- there is more to it than that.)

If you want to create a debate about if income taxes are an appropriate way to fund the Federal government that would be an entirely different issue.

-gauss

 

[PatrickA5]

^ Rayvt, I have to agree with pb4uski on this one.

SS is taxed in a matter very consistent with all other investments.

Your argument that SS is all a return of after tax money is false. See my post #5 regarding this (tl;dr; summary employer portion was not after-tax and any growth was not after tax. You are not just getting your withholding back -- there is more to it than that.)

If you want to create a debate about if income taxes are an appropriate way to fund the Federal government that would be an entirely different issue.

-gauss

+1 Many think that the 85% tax on SS benefits is taxing the same money twice. Not true, but difficult to convince otherwise.

 

[gerntz]

Because they used to be tax free.

You were collecting benefits before 1984?

 

[pb4uski]

+1 Many think that the 85% tax on SS benefits is taxing the same money twice. Not true, but difficult to convince otherwise.

This is pretty convincing. Estimated taxes that you paid for Social Security from the middle of page 3 of Your Social Security Statement. Divide that number by the monthly benefit at FRA on the upper right corner of page 1. Then divide the result by 12 to convert to years.

Mine is 3.8 years. Realistically, a portion of what I paid was for survivor and disability benefits so one could even reduce that by 20%... so make it 3 years... anything beyond that is not what you put in.

 

[VanWinkle]

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.

Quote:
Originally Posted by Tiger8693 View Post
It really stinks about taxation of SS.

Have seen a couple of advertised local seminars on planning for, and minimization of this, but am always skeptical of an annuity sales pitch or something. May just go with my guard up to see if I can learn anything.

This whole retirement planning thing is tedious and time consuming. I can't imagine what people that are not as detail oriented do. See an FA and pay I guess.


The brkts for SS taxation have never been inflation adjusted. That is the main problem I see in the current system.
__________________
Retired May 13th(Friday) 2016 at age 61.

 

[Helena]

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

Exactly!

Back in 1983 when the first tax on SS was enacted, the income levels used were considered high. But because those income amounts were never indexed for inflation, now those amounts are lower middle class at best and will eventually become poverty level. Apparently, politicians don't want to correct that problem.

.

 

[PatrickA5]

Exactly!

Back in 1983 when the first tax on SS was enacted, the income levels used were considered high. But because those income amounts were never indexed for inflation, now those amounts are lower middle class at best and will eventually become poverty level. Apparently, politicians don't want to correct that problem.

.

As SS payouts keep growing in the future, it won't take much "other income" to hit those brackets. If DW and I were to wait until 70 to collect, then 1/2 of our SS would already be over the $44K top threshold for MFJ. It's going to be pretty hard to avoid the 85% taxability of SS - unless SS is the only income you have.