Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

[Sunset]

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

Flieger

I've known a couple of relatives like that in their 90's.
I do their taxes for free, help them pick part D each year, bring them free medical devices, etc.

It's pretty limiting but if a person owns their own home it can work.

 

[NomDeER]

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.

I'm in a very similar position, though my contributions were post-tax. It's a pain to calculate. Turbo-tax isn't very good with this.

 

[GenXguy]

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

Flieger

Not really surprising. He said most of the SS was non-taxable, so he had that to live off of as well, plus if there's any other sources for money to pay for things, such as from savings, Roth IRA, etc. which would not be taxable income.

Last year, very little of my spending was paid for by taxable income, much less than $25,000! Most of my taxable income just stayed in my brokerage accounts or went into a MYGA.

 

[Flieger]

Not really surprising. He said most of the SS was non-taxable, so he had that to live off of as well, plus if there's any other sources for money to pay for things, such as from savings, Roth IRA, etc. which would not be taxable income.

Last year, very little of my spending was paid for by taxable income, much less than $25,000! Most of my taxable income just stayed in my brokerage accounts or went into a MYGA.

Ok. Just not how I want to live out my life in retirement after years of working. I hope I never get to this level.

Flieger

 

[badatmath]

I'm in a very similar position, though my contributions were post-tax. It's a pain to calculate. Turbo-tax isn't very good with this.

I never realized people had pensions they could contribute to I guess. Mine was 100% what the employer put in. Nothing extra allowed.

 

[aja8888]

Yup. 15.6% of your income please. I did it for 35 years.

I did it for over 20 years! Joining the club here.

 

[RunningBum]

...

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.

That's the SS tax torpedo. An extra $100 of income can push $85 of SS becoming taxable, and the two combined can push $185 of QDivs into being taxed. I think the marginal rate can be as high at 49.95% with all that. It sounds horrendous but it's mostly the effect of not having paid tax on SS or QDIvs at lower income, and it's just catching you up.

 

[Gumby]

That's the SS tax torpedo. An extra $100 of income can push $85 of SS becoming taxable, and the two combined can push $185 of QDivs into being taxed. I think the marginal rate can be as high at 49.95% with all that. It sounds horrendous but it's mostly the effect of not having paid tax on SS or QDIVs at lower income, and it's just catching you up.

ER Org member Sandy & Shirley has discussed this marginal tax torpedo or "hump" many times. If you run a search on the member name you can find the threads.

 

[DallasGuy]

I don't think they should eliminate taxes on SS until after they can figure out how to extend the date at which the surplus is due to run out. To do anything with SS before doing that would be making a "bad" situation even worse. If they could somehow combine an extension solution with tax reduction, that might work. But the extension must be the 1st priority imo.

 

[scrabbler1]

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

Flieger

Actually, his total income is just over $40k. His annual expenses are somewhat less. His federal tax rate is under 1%. He hasn't paid any state income tax in many, many years (because SS, IRA, pension, and annuity income are all excluded; as long the last 3 items combined are under $20k, which they are).

 

[GenXguy]

I don't think they should eliminate taxes on SS until after they can figure out how to extend the date at which the surplus is due to run out. To do anything with SS before doing that would be making a "bad" situation even worse. If they could somehow combine an extension solution with tax reduction, that might work. But the extension must be the 1st priority imo.

Unfortunately, they already made the situation worse with elimination of WEP / GPO, which makes no sense, because the lowest income retirees who need the extra dough aren't as likely to have those other sources of income like those who benefit from it.

 

[GenXguy]

Ok. Just not how I want to live out my life in retirement after years of working. I hope I never get to this level.

Flieger

If you have a really massive savings, you could live a pretty nice level without living on any taxable income.

 

[pb4uski]

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

Flieger

My DGM lived on SS alone, albeit in government subsidized housing where her rent was based on her income. A ultra-frugal friend my age lives on SS and $11k a year from a rental.

 

[Out-to-Lunch]

That's the SS tax torpedo. An extra $100 of income can push $85 of SS becoming taxable, and the two combined can push $185 of QDivs into being taxed. I think the marginal rate can be as high at 49.95% with all that. It sounds horrendous but it's mostly the effect of not having paid tax on SS or QDIvs at lower income, and it's just catching you up.

ER Org member Sandy & Shirley has discussed this marginal tax torpedo or "hump" many times. If you run a search on the member name you can find the threads.

In one of those Sandy and Shirley thread @Exchme observed this:
"Less well off people may face high effective marginal rates throughout their lives due to income and asset based assistance they may get at different times - welfare, housing assistance, Medicaid, child care, ACA subsidies, college financial assistance, medicare subsidies (stepped down via IRMAA tiers), tax brackets, SS taxation. As these are phased out for higher income folks, the loss of the break can create very high effective tax brackets. But that is inherent in the math of offering breaks to less well off folks in the first place. The transition from preferences/benefits to no preferences has to occur somewhere and those transitions mathematically must have higher marginal rates." (Emphasis added.)

This is, perhaps, obvious, but I had never seen it stated so concisely and incisively before.

 

[pb4uski]

^^^ I'm seeing this with a tax return I just finished. With the increase in interest rates this couple's interest income has increased (and redeeming ibonds is in there was well).

The higher income causes more of their SS to be taxed... 85% in 2024 vs 75% in 2023 vs 70% in 2022.

 

[NomDeER]

I never realized people had pensions they could contribute to I guess. Mine was 100% what the employer put in. Nothing extra allowed.

It's not just allowed in my case. It's required.

 

[SecondCor521]

As already alluded to, the bill is in committee. Lots of bills die in committee. Lots of bills pass one chamber but not the other. Some bills get vetoed. I think even some bills don't make it through the reconciliation process successfully.

I'm not holding my breath, and I'm also not even paying attention to any proposed bills. When the news folks indicate that a bill has been signed into law, I'll read the text and see how it affects me and my family.

 

[latexman]

Until it becomes law, it’s a teaser.

 

[Time2]

Representative Thomas Massie Reintroduces Bill to Eliminate Social Security Double Tax. Washington, D.C.

If that is a headline, as far as my calculations, 'double taxation' is not completely accurate. I recently calculated what percentage of your FICA is actually taxed..
I worked with chatGPT on this double taxation idea and how much is actually double taxed until it was close to what I calculated for the 12% tax bracket. Then I ask it to do the other tax brackets. In the end it concluded with,
"While FICA itself is not explicitly taxed, the way federal income tax is calculated on gross income leads to a portion of FICA being taxed indirectly—and that portion grows as income increases."
The higher your tax bracket the more of your FICA that gets taxed. If you care to verify the method, (for my edification) you can follow how I persuaded ChatGPT to calculate this, (right or wrong). It is a little low in it's calculations, less than 1%, but I ran out of attempts trying to get it to calculate this using gross income instead of after the standard deduction. If you care to follow along here is the link to my discussion.

ChatGPT - FICA Tax and Federal Tax

Shared via ChatGPT

chatgpt.com

Or some might try the calculation yourself. For the top of the 12% tax bracket I calculated 11.84% of your FICA is taxed.

 

[Gumby]

First, mixing in the Medicare component of your FICA contributions just confuses the issue. Second, the calculation does not appear to account for the fact that there is a cap on income for SS contributions. Third, I think it is a mistake to include anything but wage income in the calculation. Fourth, and most importantly, the current exemption from taxation of at least 15% of your Social Security payment already accounts for the fact that you paid tax on your gross income, including the amount that was contributed to the SS system.

 

[target2019]

Time2, that is one interesting chat you had. My conclusion is that as in the past, the held-out carrot has 3 beneficiary classes. Who gets the entire carrot?

The net effect from eliminating the tax will result in accelerated collapse of the system. That has been the political goal as far back as I can remember.

 

[TheWizard]

Time2, that is one interesting chat you had. My conclusion is that as in the past, the held-out carrot has 3 beneficiary classes. Who gets the entire carrot?

The net effect from eliminating the tax will result in accelerated collapse of the system. That has been the political goal as far back as I can remember.

Oooooh...politics!

 

[Time2]

First, mixing in the Medicare component of your FICA contributions just confuses the issue. Second, the calculation does not appear to account for the fact that there is a cap on income for SS contributions. Third, I think it is a mistake to include anything but wage income in the calculation. Fourth, and most importantly, the current exemption from taxation of at least 15% of your Social Security payment already accounts for the fact that you paid tax on your gross income, including the amount that was contributed to the SS system.

Gumby you are right about the Medicare, I didn't catch that. I should use 6.2%. I'll attempt to correct that.
Good point about some peoples income is more than just work income. I don't see where the fourth point is relevant, I'm just trying to get to how much of our SS is taxed when we pay SS into the system. Clearly I'm not there yet, I'll try to calculate how the change from 7.65% to 6.2% will affect the 11.84% I initially calculated for the top of the 12% tax bracket. I went to ChatGPT to do the other brackets, the more I chatted the worse it's answer got. And then there is the argument that the employers contribution is actually yours, but I'm not going there, others can if they want. Thanks for the critic. I'll try harder!


Oh, I started the correction and here's my initial explanation to ChatGPT, I did use 6.2%. I will concede this is only if all your income is subject to SS tax and this is only for the top of the 12% tax bracket. So, we do have these constraints, otherwise there are just too many variables without a program to add all the variables. The point of all this is, we don't pay tax on 100% our SS contribution, it is between 11% and 30%.
This is me telling Chat GPT how to calculate this, (again right or wrong)

" Let me try one example. income $123,500 - $29,200 standard deduction is $94,300. If we calculate the SS tax on the gross at 6.2%, that is $7,657, The Federal tax after the standard deduction would be, first 10%, $2,320, and 12% $8,532 for a total of $10,850. Adding both together would total, $18,507. If we calculate the other way where we subtract SS and then calculate Federal tax. We take $123,500 and subtract $7,657 we have $115,843. Then subtract the standard deduction from that $115,843 and get $86,643. now if we apply the tax brackets we get $2330 + $7,613.04 = $9,943.04 then add in the SS tax of $7,657 for a total of $17,600.04. So we paid an additional $18,507 - $17,600.04 = $906.96. Thus $906.96 / $7657 = 11.84% of the SS tax."

 

[Gumby]

I thought you were trying to show that there is double taxation of social security. Except for a small amount if you were close to the wage cap for your whole career and continue to be in a high tax bracket after you quit working and take SS, I think that is incorrect. That was the only reason for my fourth point. But it seems I misunderstood what you were trying to accomplish. So, as Emily Litella famously said, "never mind."

 

[VanWinkle]

I don't expect anything on this. I also didn't expect the Hill to eliminate the SS WEP and GPO provisions, but I just got a lump sum payment for the last six months of spousal benefits and am approved for monthly benefits going forward.

You should have received 12 months as it was retroactive to 01/01/24