Should Social Security be taxed?
About a third of Social Security recipients pay federal income tax on a portion of their benefits. Is that fair?
This post comes from Jim Wang at partner blog Bargaineering.
After a post a few weeks ago about reading your Social Security statement, reader "J. Shoe" asked the following question:
Just trying to find out if it is true that any Social Security benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and is there a link to see this horrific scam? It's bad enough they borrow from SS without the intention of paying it back, but this crazy.
I don't see how it's crazy, but I also didn't fully understand how Social Security benefits are taxed. For more information, I turned to Publication 915: Social Security and Equivalent Railroad Retirement Benefits (.pdf file), which is the IRS document that explains everything.
Are your benefits taxable?
Add up all the benefits you received, which is in Box 5 of your Form SSA-1099. Take half of that amount and add it to your taxable pensions, wages, interest, dividends and other taxable income. Then add any tax-exempt interest income, such as from municipal bonds or savings bonds. (Post continues below.)
Now compare that number with the base amount for your filing status (these are 2011 figures):
- Single, head of household, or qualifying widow(er) -- $25,000.
- Married filing jointly -- $32,000.
- Married filing separately (living apart) -- $25,000.
- Married filing separately (living together at any time during the year) -- $0.
If your total is less than the base amount for your filing status, you are not taxed on any portion of your benefits. If your number is more than the base figure, you'll be taxed on up to 50% of your benefits. If your base number is greater by a significant amount -- $9,000 more for single, head of household and qualifying widow(er) or $12,000 more for married filing jointly -- then you'll be taxed on up to 85% of your benefits.
The Social Security Administration says that about a third of recipients pay federal income tax on a portion of their benefits.
Should Social Security benefits be taxed?
I don't think so. When you make (forced) contributions, those amounts are deducted from your income but you still pay income taxes on them. When you get disbursements from the SSA, you can be taxed on up to 85% of your benefits, which means you're getting a 15% discount, but it's on contributions that were already taxed when you made them.
It's a little messy because you get more out of Social Security than you put in, but you were taxed going in, so should you be taxed going out? It's like making a contribution to a Roth IRA and then being taxed on the back end too.
More on Bargaineering and MSN Money:
No it should not. does the Government raise it when cost of living goes up.
why do people that retire from the military. get retirement pay, and federal pay. that's two checks.
that's a lot of money also. I know of one person collecting over 5000 a month... than he will get his SS on top of this... Really....
THANKS ROADHOUSE... THAT WAS MY RATIONALE ON THIS - BUT THAT SAID, IF THERE IS AN "EXPECTATION" OF GETTING BACK MORE IN SS PAYMENTS LATER IN LIFE THAN WHAT YOU PUT IN VIA THIS TOUTED "INVESTMENT VEHICLE", THEN WOULD THIS EXPECTED "PROFIT" BE SUBJECTED TO TAXATION? HOW MUCH? IS THIS THE LOGIC THEY ARE TRYING TO USE HERE? WHICH BRINGS ME TO ANOTHER INTERESTING THOUGHT... THERE WILL BE WINNERS AND LOSERS IN THIS AS WELL, SINCE THOSE WHO HAVE A GREATER DISPARITY OF DRAW VS. THEIR CONTRIBUTION WOULD BE TAXED MORE... AND HOW ABOUT THOSE WHO WILL NEVER SEE AS MUCH AS THEY PUT IN, WHICH MAY BE MORE THEN HALF THE POPULATION AT SOME POINT, IF NOT ALREADY... ???????????????????????
The analogy to the Roth IRA was most appropriate. When you contribute to a Roth, it is after tax, i.e., you are still paying Federal income tax on that amount. However, when you withdraw it, it is tax free, because you have already paid tax on it. Your SS contributions are considered a payroll tax, but I believe that is a misnomer because you are entitiled to eventually get it back, which really makes it more of an investment, which was the original idea when the SSA was created. However, the amount of your SS contribution is still subject to Federal income tax, the same as your Roth contribution, so why should you be taxed on SS withdrawals. Basically, isn't this a classic case of double taxation?
And yes, some people will get more back than they contributed, which is the intent of SS, because it was designed as an investment vehicle. If you contribute $1K to a Roth, do you do so expecting to get back only $1K after 30 years. I certainly hope you are not that stupid, and the same goes for SS, investments are intended grow and return more than contributed, that is until Congress steps in and Fs it up..
OK I AM NOT AN EXPERT BY ANY MEANS ON TAX CODE OR "IRS LOGIC", BUT IN THE MIDST OF THE "DOUBLE TAXATION" TALK MAYBE SOMEONE CAN ANSWER THIS QUESTION: IS SOCIAL SECURITY TREATED AS A "PRE-TAX DEDUCTION"? IF OUR INCOME DOESN'T REFLECT REDUCED TAXABLE INCOME FIGURE EVERY YEAR BECAUSE OF SS (WHICH I DON'T THINK IT DOES), THEN I WOULD SAY BY PURE DEFINITION IT'S DOUBLE TAXATION IF IT'S TAXED UPON YOUR DRAWING SS LATER. AM I OFF BASE HERE?
In 1981 the National Commission on Social Security Reform (sometimes referred to as the Greenspan Commission after its Chairman) was appointed by Congress and President Reagan to work on the financing crisis in Social Security. The result of their study included several amendments that were passed by Congress, signed by President Reagan and made into law in 1983. The specific rule applying to the taxation of Social Security benefits for the first time is copied below:
If the taxpayer's combined income (total of adjusted gross income, interest on tax-exempt bonds, and 50% of Social Security benefits and Tier I Railroad Retirement Benefits) exceeds a threshold amount ($25,000 for an individual, $32,000 for a married couple filing a joint return, and zero for a married person filing separately), the amount of benefits subject to income tax is the lesser of 50% of benefits or 50% of the excess of the taxpayer's combined income over the threshold amount. The additional income tax revenues resulting from this provision are transferred to the trust funds from which the corresponding benefits were paid. Effective for taxable years beginning after 1983.
As long as good middle income jobs continue to disappear, the problems will surmount!
Paying S.S. on minimum wages will never feed the system with enough income.
No one wants to pay taxes, but until historical tax levels are reinstated our country will continue to see economic disintegration.
Where is the United States that once believed and practiced "love thy neighbor?"
Everyone has been so fixated on themselves that they have forgotten that in the overall scheme of things, helping others is really about helping oneself.
You can't play a game of marbles if you own all the marbles!
I have no problem paying taxes on my SS benefit as I make a very good retirement income. SS is not a 'government pension' or a 'personal investment account'. It's an insurance program, born out of the depression era, funded by current workers, to provide a basic income for currently retired workers. The SS Trust Fund is the excess collections, that are borrowed by the gov't , for which interest is paid. This is a huge amount and comprises a big chunk of the Federal debt.
As the Fund will someday be depleted I believe that any taxes levied against benefits paid out should be returned to the Trust Fund, not stolen by the gov't. This would ensure solvency of the Fund, at least for a while longer than current projections.
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