Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

[Bigbass]

You might want to file an amendment if it's not too late....

What is self-employment tax?​

Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

Employers calculate Social Security and Medicare taxes for most wage earners. However, you calculate self-employment tax (SE tax) using Schedule SE, Self-Employment Tax, (Form 1040 PDF or 1040-SR). Also, you can deduct the employer-equivalent portion of your SE tax when calculating your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.

 

[USGrant1962]

I was self employed. I paid the employer's side of the contribution. It wasn't deductible either like it would be to an outside employer. How does that figure into the contribution part being taxable ?

Yes it is deductible - that is 1/2 of SE tax representing the employER portion.

 

[Stormy Kromer]

I don't think that's right.

Self-employment tax (Social Security and Medicare taxes) | Internal Revenue Service

Self-employment tax rates, deductions, who pays and how to pay.

www.irs.gov

Well then I was wrong. I'm sure my CPA did it right and I paid the taxes.

I don't mean to whine about paying the entire 15.6% of the self employment tax. I would like to point out to others that are not self employed that you are really paying all of it too. When the employer is determining their cost to employ you, they are building their matching contribution into the cost of hiring you. You just don't see it.

I really believe that income tax (including FICA) would be much, much more closely watched if it weren't for mandatory withholding which came around in WWII, and everyone had to write out a check each quarter to the Federal and State government like self employed people do. People would realize how big of a bite the gov't takes from their income. Plus the government would never collect from a lot of individuals. Their money would be long gone before tax day each quarter.

Sorry mods if this is too political...I apologize.

 

[bada bing]

Here is a research report regarding the history of the imposition of taxes on social security. The 1979 Advisory Council said the numbers were actually 17% and 83%. The 17% represented the worker's contributions. The 83% represented the employer's contribution (which were not not taxed to the worker when contributed), and the earnings on both the employee and employer contributions. They concluded that if social security were treated like private pensions, 83% would therefore be taxable. So I'm 2% off.

Social Security History

That is the published position and explanation for the tax treatment of SS. But it doesn't stand up to scrutiny, at all. The 15% basis in benefits is only applicable on the cohort. The individual numbers are all over the place, with some people having much more basis than 15%. SS has the worst tax treatment of any savings vehicle for those that actually pay on 85%. The common retirement vehicles are:
tIRA and other qualified accounts, including qualified contributory pension plans. In those plans the participant contributions are tax deferred. Not true with SS, FICA starts at the first dollar.
Roth. Pay the tax on contribution money upfront (like SS), but all future benefits are tax free.
Taxable brokerage. Taxed going in. Gains are taxed when realized, but at LTCG rates.

Then there the problem of not including credit for FICA paid in past top 35. Something the "Fairness Act" didn't address. And neither does the taxation of SS. Levying FICA for years past top 35 and also taxing the earnings used to pay those FICA taxes is flat out theft.

SS tax treatment is most akin to making a non-deductible tIRA contribution, but not having any backdoor. And not surprisingly, non-deductible tIRA contributions with no backdoor are something that any competent financial planner will tell you don't make sense at all.
The rationale of making SS consistent with defined benefit plans also begs the question, why did they stop at tax treatment ? Why didn't they make SS consistent with spousal and survivor rules common in pension plans? Consistent with QDRO for pension treatment in divorce? If there is a need for funding, there's a pretty big pot of money there and the justification has already been put forward.

Honestly, the government's justification is so bad they would be better off to not have made it. I would have appreciated being told the truth "We are imposing a means test on you" rather than a lie that insults my intelligence.

We have already started down that path.... WEP/GPO change. Might as well sink the sword in deeper!

Flieger

Yes. My opinion had been that the looming shortfall was going to take some shared sacrifice. After the "Fairness Act", I'm firmly on the side of "get while the getting is good". Not that my opinion is heard, but I'm in favor of the taxes being rescinded. Not because it's good for the program. Because it makes a more level playing field on the race to the bottom.

 

[camfused]

I would rather they left the taxation in place but just index the income thresholds for inflation since 1983 and continue yearly adjustments from there so it doesn't keep getting more and more low income seniors hit with higher amounts of taxation of their benefits.

Do we know what the numbers would currently be if they implemented this?

 

[NomDeER]

SS has the worst tax treatment of any savings vehicle for those that actually pay on 85%.

And, yet, those also are the people who will benefit the most if they stop taxing Social Security.
Low income seniors aren't paying a lot of taxes on Social Security. OTOH, more affluent people are paying taxes in higher tax brackets (and often are receiving higher Social Security payments), so they would get the biggest dollar amount in savings if Social Security were not taxed.

I don't love paying taxes. Who does? And I know that I would benefit more than most if there were not taxes on Social Security. But, I'm paying taxes on the part of my pension that was not a contribution. I don't think it's unreasonable to be taxed on part of my Social Security.

 

[pb4uski]

Your employer's contribution is your contribution too. You really paid it and didn't know it. Every employer builds that cost into your wages when they hire you. Their match was really your contribution, you just didn't get it to begin with. Its built into your contribution package and you don't see it.

Whether it was your contribution or not isn't relevant. While I don't agree with you even if I concede the point, the fact is that you have never been taxed on it. Just like employer contributions and growth on a contributory pension plan are taxed, employer contributions and growth of SS are taxed. In both cases you are receiving income that you have no basis in.

 

[pb4uski]

I was self employed. I paid the employer's side of the contribution. It wasn't deductible either like it would be to an outside employer. How does that figure into the contribution part being taxable ?

You got a deduction for 1/2 of your SE tax, just like the employer does for salaried employees.

 

[pb4uski]

....And I know that I would benefit more than most if there were not taxes on Social Security. But, I'm paying taxes on the part of my pension that was not a contribution. I don't think it's unreasonable to be taxed on part of my Social Security.

You nailed it.

To not tax a portion of SS is politically popular but is also intellectually corrupt and poor public policy. [MOD EDIT]

 

[pb4uski]

....The 15% basis in benefits is only applicable on the cohort. The individual numbers are all over the place, with some people having much more basis than 15%. ...

I agree the 15% is a very broad brush approach, but for many it is in the ballpark.

We know how much each recipient contributed since it is on their SS statement, so it would be possible for the SSA to do an individual calculation of how much is a return of contributions and therefore not taxable and report it on your 1099-SSA just like the taxable portion of pension benefits for contributory pension plans are reported. IMO, that would be a better and fairer approach.

 

[pb4uski]

.... I would like to point out to others that are not self employed that you are really paying all of it too. When the employer is determining their cost to employ you, they are building their matching contribution into the cost of hiring you. You just don't see it....

That's somewhat true... you don't see it though at one point one of my employers issued each employee an annual report showing my salary, bonuses, SS taxes pay on my behalf, value of retirement contributions, 401k match, vacation pay, sick pay, health insurance, disability insurance, life insurance, etc and it was included in our total benefits in that report.

But what says that it would go to the employee if the employer didn't pay it? Nothing! It might go to corporate profits.

 

[Koolau]

And, yet, those also are the people who will benefit the most if they stop taxing Social Security.
Low income seniors aren't paying a lot of taxes on Social Security. OTOH, more affluent people are paying taxes in higher tax brackets (and often are receiving higher Social Security payments), so they would get the biggest dollar amount in savings if Social Security were not taxed.

I don't love paying taxes. Who does? And I know that I would benefit more than most if there were not taxes on Social Security. But, I'm paying taxes on the part of my pension that was not a contribution. I don't think it's unreasonable to be taxed on part of my Social Security.

I'm strictly curious but how do you know what part of your pension was not a contribution when you take a payment? Does the pension plan track all that for you?

 

[pb4uski]

^^^ When you receive your 1099-R from the pension plan at tax time it shows total benefits received and the taxable amount.

 

[Gumby]

I'm strictly curious but how do you know what part of your pension was not a contribution when you take a payment? Does the pension plan track all that for you?

Except for a small amount that I paid to buy pension time for my military service, my pension contributions were pre-tax, so now I pay tax on virtually all of my pension income. I know my basis and have to calculate the very small percent (~4%) non-taxable every year.

..... SS tax treatment is most akin to making a non-deductible tIRA contribution, but not having any backdoor. .....

That's how I've always conceptualized it, but also having monthly required distributions of a specific amount.

And, yet, those also are the people who will benefit the most if they stop taxing Social Security. Low income seniors aren't paying a lot of taxes on Social Security. OTOH, more affluent people are paying taxes in higher tax brackets (and often are receiving higher Social Security payments), so they would get the biggest dollar amount in savings if Social Security were not taxed.

I don't love paying taxes. Who does? And I know that I would benefit more than most if there were not taxes on Social Security. But, I'm paying taxes on the part of my pension that was not a contribution. I don't think it's unreasonable to be taxed on part of my Social Security.

I happily pay both federal and state tax on 85% of my socially security and I agree 100% with your position

 

[Stormy Kromer]

This has been an interesting thread. I wondered how the gov't decided to tax 85% of the benefits. It makes more sense to me now and thanks to your explanations I understand the reasoning behind it being taxable.

A follow up question. Why aren't benefits taxed at the first dollar of taxable income instead of after certain income levels ($25,000 single, $34,,000 jointly). I'm not complaining, I have no problem for lower income SS recipients to not be taxed until these levels are reached, it is obviously a larger % of their income to live on. It just seems inconsistent that when 85% of SS payments are actually taxable, then shouldn't it all be taxable instead of only the amount over a certain level ?

If one's income does exceed the income limit ($25,000 single or $34,000 joint) does the 85% taxable amount apply to the entire SS benefit or only the income over this threshold ? Is there a situation where a recipient could end up paying more in taxes if their income level exceeds the income limit by a few dollars ? I'd hate to see a recipient on the cliff lose money if they did.

 

[pb4uski]

A follow up question. Why aren't benefits taxed at the first dollar of taxable income instead of after certain income levels ($25,000 single, $34,,000 jointly). I'm not complaining, I have no problem for lower income SS recipients to not be taxed until these levels are reached, it is obviously a larger % of their income to live on. It just seems inconsistent that when 85% of SS payments are actually taxable, then shouldn't it all be taxable instead of only the amount over a certain level ?

Why? Politics, that's all. In order to get the votes needed to tax 85% of SS there needed to be concessions to tax less of SS for lower income recipients. I agree with you on both counts... it is inconsistent but at the same time it doesn't bother me to get those low income recipients a break.

 

[Stormy Kromer]

Why? Politics, that's all. In order to get the votes needed to tax 85% of SS there needed to be concessions to tax less of SS for lower income recipients. I agree with you on both counts... it is inconsistent but at the same time it doesn't bother me to get those low income recipients a break.

That's what I was wondering. It doesn't bother me either that it is not taxed until an income level is reached. I know a lot of elderly people who's primary source of income is their SS. When I helped my parents with their income taxes they were right on the bubble of their SS being subject to income tax. Some years it was just under and some years it was just over the threshold and it impacted their taxes accordingly.

I'm not collecting SS yet. When I do start collecting I'll be paying tax on 85% of it. Now I understand why.

 

[Flieger]

While we will pay 85% for SS (until/unless that is changed), our state does not tax SS, and as I posted in another thread, they recently started a bill to eliminate income tax (which I believe has a snowball's chance of passage). If either of those go through I will take it. I believe anyone is free to provide as much money in taxes, above compulsory, to the government they desire.

Flieger

 

[scrabbler1]

I have been doing my 94-year-old dad's taxes for the last 5 years. I do them by hand, with the aid of a homemade spreadsheet, just like how I do mine and do the taxes of 2 friends. This includes programming the taxation-of-SS-benefits worksheet into the spreadsheet.

My dad's income is right at the cusp of having any of his SS benefits subject to tax. So, in most of the last 5 years, with his SS benefits representing about 60% of his total income, maybe 10% of his benefits have been taxable. Eliminating the total taxation of SS benefits would save him maybe $100-$150 a year in taxes, of the roughly $300-$400 total taxes due.

One odd thing I noticed while doing his taxes came in the year he made added withdrawals from his IRA because of some added expenses. The effective marginal tax rate was much higher than just the tax rate on the added withdrawals because more of his SS benefits became taxable, just about doubling the overall marginal tax rate. Indexing the tax bracket(s) for making SS taxable would fix that to some degree.

 

[GenXguy]

If one's income does exceed the income limit ($25,000 single or $34,000 joint) does the 85% taxable amount apply to the entire SS benefit or only the income over this threshold ? Is there a situation where a recipient could end up paying more in taxes if their income level exceeds the income limit by a few dollars ? I'd hate to see a recipient on the cliff lose money if they did.

Only half of SS benefits are used in calculating that total provisional income threshold. And there is no cliff. Only the dollars above those thresholds are taxed at the higher rate.

 

[Chuckanut]

Most people I know who struggle to make ends meet and also get SS payments pay little if any federal income tax. What they need is low inflation, not a tax break on their SS payments.

 

[TheWizard]

Here's a link to that bill: https://www.congress.gov/bill/119th-congress/house-bill/1040

So what typically happens next? Does the Ways & Means committee usually vote yes/no in a timely fashion on whether to release bills out for a vote by the full house?

Or do they just do nothing, if opposed, and let the bill die when the 119th Congress ends late next year?

 

[GenXguy]

Here's a link to that bill: https://www.congress.gov/bill/119th-congress/house-bill/1040

So what typically happens next? Does the Ways & Means committee usually vote yes/no in a timely fashion on whether to release bills out for a vote by the full house?

Or do they just do nothing, if opposed, and let the bill die when the 119th Congress ends late next year?

Probably nothing happens, just like these two from years ago that would have changed taxation on SS benefits:

https://www.congress.gov/bill/116th-congress/house-bill/860

https://www.congress.gov/bill/117th-congress/house-bill/4453

 

[Aerides]

A great many bills never see the light of day. Once it is out of committee, it might have traction, but from everything I'm reading, the House has some priorities that will take up most of 2025, at least the first half of the year.

 

[Flieger]

I have been doing my 94-year-old dad's taxes for the last 5 years. I do them by hand, with the aid of a homemade spreadsheet, just like how I do mine and do the taxes of 2 friends. This includes programming the taxation-of-SS-benefits worksheet into the spreadsheet.

My dad's income is right at the cusp of having any of his SS benefits subject to tax. So, in most of the last 5 years, with his SS benefits representing about 60% of his total income, maybe 10% of his benefits have been taxable. Eliminating the total taxation of SS benefits would save him maybe $100-$150 a year in taxes, of the roughly $300-$400 total taxes due.

One odd thing I noticed while doing his taxes came in the year he made added withdrawals from his IRA because of some added expenses. The effective marginal tax rate was much higher than just the tax rate on the added withdrawals because more of his SS benefits became taxable, just about doubling the overall marginal tax rate. Indexing the tax bracket(s) for making SS taxable would fix that to some degree.

Wow! He is living off of less than $25k (or $34k) taxable income? Impressive. Or sad.

Flieger