FYI: Tax reform is in the air— again. This means we will be subject to the wretched posturing of politicians saying they want to help the middle class. They will do this by giving us some of our income back and calling it tax relief
Well, I have a suggestion.
Start by providing tax relief for embattled middle-income seniors. Start helping middle-class Americans by ending the taxation of Social Security benefits. It will increase consumer spending by about $33 billion. It will enable some seniors to retire. And when they retire it will create a job opportunity for a young person
Yes indeed it is; and, well said, Ted.
T E A (Taxed Enough Already)
The initial clue is in the paragraph immediately following the lead two quoted above. Mr. Burns gives an example where SS benefits double a couple's income, and consequently slightly more than doubles this couple's income tax. Not surprising - income taxes are graduated - the higher your income, the higher the percentage you pay.
(Like Mr. Burns, I'm playing fast and lose with rules and numbers here; my objective here is to demonstrate the games, not to be accurate, though I'll be glad to explain my trickery if asked.)
Mr. Burns ignores this principle of graduated taxes, just as he disregards the fact that one would expect taxes to roughly double if income doubles. Instead, he uses the soundbite: "The tax bite is more than double", shedding more heat than light.
He's operating from a common, but false, assumption - that somehow SS benefits are not "income". He writes that SS "more than double[s]" the couple's taxes, but is silent about the fact that SS is also doubling the couples income. He seems to have discounted this money as income altogether.
Ironically, the quirkiness in the taxation of SS was designed to help lower and middle class retirees. Instead of taxing SS as one would tax a private pension or annuity (like a nondeductible IRA - taxing everything except what was originally contributed post tax), the IRS gives low income retirees a break. It doesn't tax the SS income (benefits) at all until a certain income level is reached; then it gradually phases out this exemption of SS income from taxation. (See link at end of my post for background on this tax break.)
A mathematical consequence of any exemption phaseout is an increase in marginal tax rates. No way around it. For example, suppose that for every $ 2of extra income, you had to pay income tax on an additional $1 of SS benefits, until all the SS benefits were taxable. If your nominal tax rate were 15%, then on an extra $2 of income, you'd be taxed 15% of ($2 plus $1 in SS benefits). So that $2 would be taxed 15% * $3 = $0.45. That's a 22.5% marginal tax rate.
Would it be better if instead of taxing only some SS benefits, we taxed SS benefits for everyone? That would get rid of this quirk - the extra $2 of income would be taxed at 15%; no surtax. Somehow, I don't think that's an improvement.
You've got the same quirk in dealing with capital gains taxes for people in the 15% bracket. Say that you've got ordinary income and capital gains that together just fill the 15% bracket. So all your cap gains are taxed at 0%. Add $1 of ordinary income. That bumps $1 of cap gains out of its 0% bracket - so you wind up paying $0.15 tax on that $1 of cap gains, plus $0.15 on the extra dollar of income. That $1 of extra income generated an extra tax of $0.30, or 30%.
All because the IRS exempts cap gains from taxation, but phases out that exemption as your income rises. Would it be better if all cap gains were taxed at 15% (instead of providing a 0% bracket that gets phased out)?
You've got this same quirk in the phaseout of personal exemptions for high income earners. And on the phaseout of itemized deductions. And on the phaseout of the AMT exemption. And ... Nothing new here, just arithmetic.
Here's a thought. 401(k) plans are allowed to take moneys forfeited by participants (e.g. nonvested matching funds) and allocate them to remaining participants. Why not regard taxes on SS distributions as "forfeitures" also? Then that money could be fed directly back into the SS system. This would strengthen SS without technically funding it from the general budget.
Finally, if you want to understand the thinking behind taxation of SS, here's a good writeup of its history from SSA:
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.
Just saying, Derf
Also just saying, Dave
But, it gets more and more complicated. For those who file quarterlies, it must be a huge pain.
Is the income tax the answer? Some countries use the VAT system, including the country I reside in most of the year. I don't have a answer but the system we have now is way too convoluted and is becoming intrusive with the new powers the IRS has picked up lately.
There has to be a better way. I'll probably never see it in my lifetime.
Regarding the formula for taxation of SS benefits that Derf quoted, the design is a rather creative way of phasing in taxation of SS that smoothly transitions from the benefits being tax-exempt at low incomes to a full 50%/85% taxation at higher income levels. But you don't need to understand the design to implement it - just use the IRS worksheet:
Regarding VAT - like the sales tax in the various states, municipalities, and counties of the United States, it's an extremely regressive tax, and greater reliance on this form of taxation would make matters worse for lower income households. Here's a short column from the UK, entitled VAT vs. Income Tax that discusses this issue from a UK perspective - where both taxes are used.
IMHO technology won't solve what is fundamentally a question of competing and incompatible policy choices. Take the example of a new baby. What do you do when the baby is born Dec 31st? You can't make an adjustment on a single paycheck that will compensate for a year's worth of higher income tax exemptions. But you can fix that problem by saying that if your family increased in size in the last week of the year, you only get to add 1/52 of an exemption, not a full year as is done now.
Cleaner, simpler (except for the arithmetic, which technology can handle), but it does away with the idea of giving new families a little bit of a head start financially by giving an exemption credit for the whole year. Some things are prorated in the tax code, others are not. Whether by accident or design, changing (simplifying?) any of these has side effects which may be desirable, undesirable, or both.
As one who will pay the higher tax (willingly; this is a great country in which to live) on my retirement income, I see people five days a week who can't make ends meet on their SS income and would gladly trade places with those who have non-SS income on which to pay taxes. Hard to stay in school past the 8th grade when your family needed someone to pick the cotton; hard to find a job paying even minimum wage after that. Saving for retirement? Retirement? That's what came when you were too crippled to work, or simply couldn't get any kind of job.
I don't know anyone who is still working because their SS is taxed (although I know several who complain about it.) Those in desired positions are making "good money", which they will do as long as they can. Their SS income is an added bonus. The Wal-Mart greeters most likely aren't paying taxes on their SS, unless they are working to avoid staying home with their spouse - not a trivial consideration.
If we had chosen to pay taxes to cover our country's, counties' and municipalities' expenses over the past decades, then we could legitimately complain. When a candidate suggested we should do that, he or she was rejected.
Interesting to see the budget deficits in Kansas and impending in Wisconsin, and the reduction of services that I think are necessary in other states since they cut their taxes. Reducing services should precede reducing taxes, IMHO.
If you have the (financial) misfortune to need prolonged nursing home care, will you reject Medicaid and ask to be put on the sidewalk or euthanized when your funds are exhausted? Payment for nursing home care is one of the major threats to our future.
Most people complain about this tax or that tax, but never want to stop spending on A, B and C, just X. They want their benefits but don't want to pay for it. I want my benefit, but that national debt is not mine.
Exactly. Unfortunately, this has been the end result of democratic government ever since Greece. The men who framed our constitution well understood that, and attempted to put in place sufficient checks and balances to avoid that outcome. Starting with the Whiskey Rebellion in George Washinton's tenure, It took a couple of hundred years to find work-arounds for those protections, but we've succeeded.
There have been proposals to do that here - after all, the IRS already receives your W-2 and 1099 info from the payer electronically. (As a VITA tax preparer I see a lot of taxpayers who have lost their documents and have gotten a transcript from the IRS.) As most taxpayers have only wage income and can’t itemize deductions, this would save a lot of time and aggravation. And the IRS could then focus its limited resources on more cost-effective efforts.
Unfortunately, even consideration of such a system has opposed by lobbyists for the tax preparation industry especially Intuit and H&R Block. Unfortunately, our politicians would rather cut the IRS by spite (see ) than have an intelligent airing of the issues.
This is a short comment to a very complex concern that many citizens have with the current tax code which has become way too complex. And, with this complexity I have to employ a CPA to do my tax tax return ... and, in doing this, I get a nice bill for his services.
I have some of my father's old tax returns of years back which also included investment income in the form of interest, dividends and capital gains. It was very simple to complete and not complex these old 1040's. Today, give me a break, with all the lobbist and special interest groups we now have a very complex system that even my CPA this year told me I am filing your reurn under my best knowledge of the current tax laws.
Seems, even the professionals are now caught in a clog myer.
So for me ... its T E A (Taxed Enough Already) time; and, a flat (or step tax) tax would be well received at this household.
APRIL 13, 2015
The biggest U.S. tax breaks
BY DREW DESILVER Drew DeSilver is a senior writer at Pew Research Center.
"Here’s something for taxpayers to consider: the more than $1.3 trillion worth of tax breaks that are allowed under the U.S. tax code."
"In a recent Pew Research Center survey, 59% said there’s so much wrong with the tax system that Congress should completely change it (versus 38% who say only minor changes are needed). While that sentiment has become more partisan since the last time we asked the question in 2011, even half of self-identified liberal Democrats favor completely changing the system."
State tax rates
This is not quite 'where you tax dollar went', clearly, and some criteria for inclusion or breakout are different; note US mil fig here is just above 19%, not 27%. Also do not know quality of work (data or analysis).
This can fill things in somewhat: