Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

[VanWinkle]

How about we just ask them to index the SS tax brkts to inflation like almost every other tax brkt? That would eliminate the taxation on a large majority of people except the "rich" that they all seem to loathe.

 

[GenXguy]

How about we just ask them to index the SS tax brkts to inflation like almost every other tax brkt? That would eliminate the taxation on a large majority of people except the "rich" that they all seem to loathe.

Assuming you mean the SS 50% and 85% income thresholds, I mentioned that here:

Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

I might have missed another thread on this, but apparently the House has introduced H.R. 1040 to eliminate federal taxation of Social Security. Very early in the process so will be interested to see how this progresses this year.

www.early-retirement.org

Increasing the thresholds was part of a bill a few years back that didn't go anywhere:

Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

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...

www.early-retirement.org

 

[Gumby]

Assuming you mean the SS 50% and 85% income thresholds, I mentioned that here:

Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

I might have missed another thread on this, but apparently the House has introduced H.R. 1040 to eliminate federal taxation of Social Security. Very early in the process so will be interested to see how this progresses this year.

www.early-retirement.org

Increasing the thresholds was part of a bill a few years back that didn't go anywhere:

Bill Introduced To Eliminate Federal Taxation Of Social Security Benefits?

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...

www.early-retirement.org

Moderator Note: I'll repeat what I said earlier. We don't get into the specifics of any legislation until the bill has been voted out of committee. Because ~96% of the time it won't be and it will die on the vine at the end of the current Congress.

 

[Time2]

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."

Gumby, I'm happy for the correction. Many people think we are double taxed on our SS, i.e. taxed when we pay and taxed again when we receive.
Part of what I'm trying to get across is, when we are working and paying SS from our check, only part of that is taxed and a somewhat small part. Then when we start collecting SS, some of us have tax on, up to 85% of our check. So some of us, about 50%, do get taxed on both ends, but only on a small portion of the benefit, and the small portion is at the time you pay. Unless you pay no tax when you receive.

I found two references that say only 50% of SS recipients pay tax on their benefits.

 

[NomDeER]

^^^ 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.

That is because people with lower incomes are getting a break. As they have more income, the break is decreased. I don't think this is a punishment or harsh treatment. It just means that, because you have more income, you get less of a break. That's kind of the point of the structure - give a break on taxing income to people with lower income (in addition to the fact that they would be in a lower tax bracket). I really can't get too upset about that.

Also, in general, the more you make, the more likely a source of income will be taxed at a higher rate. My pension increases my tax bracket and the amount of taxes I pay on other income. I'm not mad that I'm getting the pension, and I don't feel like it's wrong that they are taxing the part of my pension that does not represent the contributions I alread paid tax on. And, as already has been discussed, most of the Social Security contributions already have been taxed.

Also, if someone paid in less to Social Security than most people, they already are getting a better return on their investment than people who paid more. Lower income people aren't being screwed by the Social Security system IMO, though they may have been screwed in other ways such as unfairly low wages, and a decrease in the Treasury's tax revenue (or just different priorities and values) may result in them losing critical services such as Medicaid.

Plus, as I mentioned before, it is the more affluent people who disproportionately would get more money if the taxes on Social Security were eliminated. It won't have much effect on most elderly poor people.

But, I have to give kudos to those who can spin a proposed elimination of Social Security taxes as helping the elderly poor and ignore the fact that the better off are the ones who will primarily benefit.

 

[Taco]

I did a simple tax return simulation for a married couple making 100K, as follows:
- 45K pension
- 15K in dividends / interest
- 40K in Social Security (of which 85% is subject to tax)

Tax owed on the $100,000 is $7,315. An effective tax rate below 7.5%.

That amount of tax already seems really low. Lowering it further, by not taxing SS, just doesn't make sense to me. We've got to pay *something* to keep the lights on...

 

[NomDeER]

I did a simple tax return simulation for a married couple making 100K, as follows:
- 45K pension
- 15K in dividends / interest
- 40K in Social Security (of which 85% is subject to tax)

Tax owed on the $100,000 is $7,315. An effective tax rate below 7.5%.

How much would this couple save if they didn't have to pay taxes on Social Security?

How much would the couple pay in taxes if they only had the 40k in Social Security and did not have the pension and did not have any dividends/interest/capital gains or other income? How much would they save in taxes if the law were changed and Social Security was not taxed for anybody? Nothing?

You could do the same calculation for a couple with a much bigger taxable income due to investments or TIRA/401(k) withdrawals - say another $200k above your original couple - and I'll bet that they would save more money than the others if taxes on Social Security were eliminated because they would have been in a higher marginal tax bracket.

What does all this say about who would really benefit if there were no taxes on Social Security? And is there really a good reason for not requiring these more affluent people to pay taxes on Social Security (while people with less income have to pay taxes on their pensions)?

 

[Gumby]

How much would this couple save if they didn't have to pay taxes on Social Security?

How much would the couple pay in taxes if they only had the 40k in Social Security and did not have the pension and did not have any dividends/interest/capital gains or other income? How much would they save in taxes if the law were changed and Social Security was not taxed for anybody? I think it would be nothing.

You could do the same thing for a couple with a much bigger taxable income due to investments or TIRA/401(k) withdrawals, and I'll bet that they would save more money than the others if taxes on Social Security were eliminated.

What does all this say about who would really benefit if there were no taxes on Social Security? And is there really a good reason for not requiring these people to pay taxes on Social Security (while people with less income have to pay taxes on their pensions)?

I think you guys vehemently agree with each other.

 

[NomDeER]

I think you guys vehemently agree with each other.

Yes, we do. Others do not agree with us. My questions were not rhetorical. The point is to illustrate to those who disagree with us who would really benefit from no taxes on Social Security. I think it's baloney that we need to stop taxing Social Security to help the elderly poor. It would just be a tax windfall for the more affluent - and an illogical and unfair one at that. I think the spin that it would help the poor is rotten.

 

[marko]

Tried reading all the posts but I didn't see it come up yet that they only started taxing SS in 1984.

Before that it was not taxed since it was rolled out in 1935, so not taxing it doesn't seem to be a novel idea.

 

[Gumby]

Tried reading all the posts but I didn't see it come up yet that they only started taxing SS in 1984.

Before that it was not taxed since it was rolled out in 1935, so not taxing it doesn't seem to be a novel idea.

I don't know if you saw this earlier in the thread, but it briefly addresses some of the initial reasoning for making benefits non-taxable. Social Security History.

 

[Taco]

How much would this couple save if they didn't have to pay taxes on Social Security?

$3400. Their tax bill on $100K of income would be less than $4K.

How much would the couple pay in taxes if they only had the 40k in Social Security and did not have the pension and did not have any dividends/interest/capital gains or other income? How much would they save in taxes if the law were changed and Social Security was not taxed for anybody? Nothing?

Yes, with the only income being 40K of SS, their taxes now would already be $0.

 

[camfused]

^^^ For 25 years, that is about $100k, plus interest, that couple now has.

 

[almost there]

The only issue I have are the insanely low poverty level limits they have set. $34,000 for individuals or $44,000 per couple for 85% of SS to be taxed. Could add an easy 100k or 200k to each. That might help the folks that really need it. And might make it easier to get passed. Just my 2 cents.

 

[Gumby]

The only issue I have are the insanely low poverty level limits they have set. $34,000 for individuals or $44,000 per couple for 85% of SS to be taxed. Could add an easy 100k or 200k to each. That might help the folks that really need it. And might make it easier to get passed. Just my 2 cents.

It is not 0% and then suddenly 85% of your benefits are taxable. It is a sliding scale between 0% and 85% once you pass the initial thresholds. Here's how it works -- vvvvvvv


Social security taxation is based on your "provisional income", which is 1/2 of your social security plus your other AGI (note that, for purposes of calculating provisional income only, your other AGI includes otherwise tax exempt municipal bond interest). AGI is the income before any standard deduction.

Your social security starts getting taxed when your "provisional income" passes $32k MFJ/$25k Single. The percentage of your benefit subject to tax increases for each additional dollar in AGI. The exact percentage will depend on the particular mix of social security income and other income that together make up your provisional income. Thus, for example, if you and your spouse together had $28k per year in social security and $25k per year in other AGI (tIRA withdrawals, pension, part time work, etc), your provisional income would be $39k per year (1/2 of 28 plus 25 = 39) and $3500 (12.5%) of your social security benefit would be taxable.

Once provisional income hits $44k/$34k, progressively more SS gets taxed, up until the maximum 85% of it is subject to taxes at whatever your marginal tax rate is. The point at which you reach 85% of SS being subject to taxation differs for everyone, depending on their social security amount.

My recommendation is to calculate your own levels by going through the IRS worksheet here https://www.irs.gov/pub/irs-pdf/p915.pdf#page=16 and plug in your anticipated numbers. The form is fairly clear and the math is not at all daunting.
Here are links to the Form 1040 and Schedule 1 to help.
https://www.irs.gov/pub/irs-pdf/f1040.pdf
https://www.irs.gov/pub/irs-pdf/f1040s1.pdf

Here is a shortcut to determine the total income level (including all social security) at which an MFJ filer will have 85% of social security subject to taxation.

Yearly (full) social security = SS; Other Income = OI; Total Income = TI

TI = OI +SS

FOR SS > $12,000 per year -----> TI = 1.5 SS + 36,941

FOR SS < $12,000 per year -----> TI = .9118 SS + 44,000


So, suppose you and your spouse together get $45,000 in social security. You will hit the point where 85% of your social security is subject to taxation only when your total AGI from social security and other sources hits $104,441/year. That's not exactly low income. According to the Census, household median income in the US in 2023 was $80,610 Income in the United States: 2023

 

[GenXguy]

The only issue I have are the insanely low poverty level limits they have set. $34,000 for individuals or $44,000 per couple for 85% of SS to be taxed. Could add an easy 100k or 200k to each. That might help the folks that really need it. And might make it easier to get passed. Just my 2 cents.

Or at least indexed to inflation since 1983 when those levels were first set. They were reasonable at the time. I already mentioned this earlier.

 

[almost there]

Agree, its a sliding scale. But do the limits seem low to you? Or is it just me?

 

[HFWR]

Data point: ~ 2/3 of my SS is deemed taxable.

 

[Gumby]

Agree, its a sliding scale. But do the limits seem low to you? Or is it just me?

No, they don't seem low. Look again at my last paragraph.

 

[almost there]

Thanks for making me feel rich!

As GenXguy mentioned, those limits were set in 1983. 1983....................

AI answer: "The thresholds in the 1983 Social Security law were intentionally not indexed to inflation because lawmakers wanted to gradually increase the number of people subject to taxation on their Social Security benefits over time, essentially creating a "stealth tax" as incomes naturally rose due to inflation, without explicitly raising the tax rates themselves; this was done as a strategy to help stabilize the Social Security program's finances."

 

[pb4uski]

How much would this couple save if they didn't have to pay taxes on Social Security?

$4,080.

Their tax be would decrease from $7,313 to $3,232 and an effective tax rate of 3.2%.

A related question will be what happens to the federal deficit and national debt haircut date if they didn't have to pay taxes on Social Security. The CBO will probably score that sometime soon.

ETA: I later realized that since taxes on SS go into the SS Trust Fund that eliminating taxes on SS will not impact the federal deficit and national debt at all, but rather will just accelerate the haircut date. Sorry for the error.

 

[pb4uski]

Tried reading all the posts but I didn't see it come up yet that they only started taxing SS in 1984.

Before that it was not taxed since it was rolled out in 1935, so not taxing it doesn't seem to be a novel idea.

I would suggest that not taxing SS was more an oversight than a novel idea. Also, at the time that SS was put in place tax rates/brackets were extremely low so the taxes collected would have been negligible. As tax rates increased the taxes that were not collected became more and more significant so in 1984 they "corrected" their oversight. It is all spelled out in the link that Gumby provided.

 

[Gumby]

Thanks for making me feel rich!

As GenXguy mentioned, those limits were set in 1983. 1983....................

AI answer: "The thresholds in the 1983 Social Security law were intentionally not indexed to inflation because lawmakers wanted to gradually increase the number of people subject to taxation on their Social Security benefits over time, essentially creating a "stealth tax" as incomes naturally rose due to inflation, without explicitly raising the tax rates themselves; this was done as a strategy to help stabilize the Social Security program's finances."

AI doesn't know anything that I didn't already tell you in post #8.

 

[TheWizard]

I'm getting tired of this continual whining about SS taxation and the unlikely to be approved bill on its removal.
If I was a moderator here, I would lock this thread right now...

 

[GenXguy]

Thanks for making me feel rich!

As GenXguy mentioned, those limits were set in 1983. 1983....................

AI answer: "The thresholds in the 1983 Social Security law were intentionally not indexed to inflation because lawmakers wanted to gradually increase the number of people subject to taxation on their Social Security benefits over time, essentially creating a "stealth tax" as incomes naturally rose due to inflation, without explicitly raising the tax rates themselves; this was done as a strategy to help stabilize the Social Security program's finances."

Yes. Here are 3 articles I have linked to in past posts in recent years that have talked about it. I think the average person doesn't really understand they are being hit with this tax increase every year.

https://www.marketwatch.com/story/people-who-saved-for-retirement-are-being-punished-by-social-security-taxes-2019-01-07

This 33-Year-Old Social Security Rule Is Wreaking Havoc on Seniors' Retirement Income | The Motley Fool

If lawmakers addressed this issue, millions of seniors would probably see an immediate boost in their annual income.

www.fool.com

Double Whammy: the Taxation of Social Security Benefits

This week, Gail explains how the government takes away a piece of your Social Security benefits.

www.foxnews.com