FYI: The reader was upset. He didn’t know it yet, but the “tax torpedo” had just hit his retirement. That’s the name I gave the taxation of Social Security benefits back in 2003. His note asked if there was some mistake in his income tax calculations. They didn’t make sense. If he took an extra $1,000 from his IRA account it was taxed more than he expected. But if he took another $20,000, the additional tax wasn’t so painful. No matter what, his tax bill was higher--- a lot higher--- than he expected.
Regards,
Ted
https://assetbuilder.com/knowledge-center/articles/the-torpedo-tax-and-the-middle-class
Comments
It seems to me that a reduction in the SS tax would provide a huge benefit to the middle class as the author noted, but those added disposable dollars would most likely find its way immediately back into the economy, possibly spurring additional economic activity.
This makes more sense than a tax cut at the upper brackets, where the savings simply goes to a brokerage account as investment.
You'd think one of our Presidential candidates would latch onto this.
I took Social Security early until I was about to be switched over to Obamacare. I elected to suspend my payments until I was in Medicare.
I wrote Senator Schumer (D-NY) about this several months ago in a letter to his office, but have not received an answer as of his date.
Dave
Frankly, I believe Medicare should be offered as an option to purchase at 60 or 62, just like any other healthcare insurance plan.
How many folks in their early 60's are hanging around in their jobs simply to get employer healthcare coverage as prelude to Medicare eligability? Opening up their positions would create an opportunity for 20-somethings, who may be looking for a good job.
Derf
Sorry, Looks like we went from taxes to health insurance.
https://www.aaii.com/journal/article/figuring-taxes-on-social-security-benefits.touch
and a detailed analysis/projection (by SSA) of households affected by SS taxation at what percentages:
https://www.ssa.gov/policy/docs/issuepapers/ip2015-02.html
Quoting from the Background section of that paper: "Because other forms of retirement income (such as private- and public-sector pensions) were subject to income tax, policymakers eventually ... recommended that some Social Security benefits be included in taxable income."
IMHO that's perfectly reasonable - money is fungible, a pension is a pension, whether it is SS or an employer pension or for that matter an annuity.
From this perspective, the question is not why SS is taxed, but why is some of it exempt? That is, why isn't 85% of every SS dollar paid to everyone taxed? (15% of benefits is simply return of your FICA contributions; 85% represents untaxed earnings.)
The answer is that we (as represented in Congress) feel that those retirees with the lowest cash flows need the greatest tax breaks. According to the SSA paper, nearly half of all households are not taxed at all on their SS benefits.
Whenever there's a progressive tax measure (such as not taxing SS benefits on lower income retires) that gets phased out at higher incomes, marginal rates jump in the phaseout region. That's simple arithmetic. The only way to avoid that is to not phase out the tax break.
There are a couple of ways to do that. One can eliminate the tax break altogether - tax everyone on 85% of their SS income (at whatever their marginal tax rate is). That's fair (everyone gets the same deal), still progressive (because marginal rates are progressive), but onerous on low income retirees.
Alternatively, give the same tax break to everyone, including those earning millions of dollars while drawing SS. This is Burns' proposal.
The former would put SS and Medicare Part A on firmer footing, since the extra taxes go toward shoring up these trust funds (OASDI - traditional SS, and HI - Medicare Part A).
Burns is proposing removing this source of funds for SS and Medicare. Does this partial defunding of SS really help the middle class? Will people be required to keep working longer before draw full benefits? Will they be taxed higher FICA rates to make up the shortfall? Or ...?
https://smartasset.com/retirement/massachusetts-retirement-taxes
On second thought maybe they mean non-SS pensions. Gotta learn to delete a post.
Not the SS field.
If I am getting your point (sorry if not).
Otherwise, maybe send 'em email; they shd know.