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Can we get Congress to fix the system of taxation of Social Security benefits?

#1
To all who are already receiving Social Security benefits, or who will be in the near future, we need to do something to get Congress to address something they have overlooked for many years in talking about tax reform: namely, how Social Security benefits are taxed.
 
You are (or will become) aware that up to 85% of your Social Security benefits may be subject to federal income tax.  The actual percentage depends on how much in other income items you have on your tax return, including otherwise tax-favored items such as tax-exempt interest, qualified dividends and long-term capital gains, as well as other ordinary income items such as wages.
 
The latest tax law reform kept being touted as something to help "working families" (or something like that).  Congress completely left out any relief for people receiving Social Security benefits, the large majority of whom are retired (not working), elderly (however you want to define that), or disabled, or any combination thereof. 
 
Why do I say that there was no relief for those of us on Social Security?  The way that the tax on SS benefits is computed, there are certain dollar thresholds that determine how much of your SS benefits are taxed.  Those dollar thresholds were established in the early 1980s, and have never been indexed for inflation.
 
Those dollar thresholds were originally intended to tax only the wealthiest recipients of Social Security ("wealth" in the sense of other income, not assets).  However, over 30 years of inflation (and that includes some fairly significant inflation in the early 1980s -- I was there!), this tax has come to hit many people who are not "wealthy" and who have limited means of increasing their income (such as, not being able to go back to work).  Even the regular income tax brackets eventually were indexed for inflation; why not the tax "brackets" for taxation of SS benefits?
 
I've written in the past to my Senators and Representative, with no response.  Many of the people whose comments I've read in these discussion groups talk about their taxes being higher than expected in retirement when they have to start taking RMDs from their IRAs or 401(k)s, and this, I think, is due to the Social Security tax effect.  It just isn't right. 
 
Can we, as a group, try to do something?  Maybe a "letter-writing" (probably really email) campaign?  How do we mobilize a large number of Social Security recipients to get something done by Congress?
 
Thoughts?
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#2
thank you for the post, and also sharing your knowledge/experience about SS in many different posts. I learnt a lot of SS-related nuances from your posts (e.g., indirect effect of tax-exempt investments on SS receipts).
 
I haven't researched SS taxation in depth, but from the bit-and-pieces of information I get from various places, I gather the impression that the SS taxation rules are very convoluted than it needs to be. The complexity/nuances are there as if people receiving SS are pursuing rocket science as post-retirement career and have lot of time that can be devoted to work through the details of the overall taxation impact!!
 
I do not fully understand why SS income isn't treated in the same way as any other income that's taxed either at regular progressive rate (i.e., treated as ordinary income), or qualified rate (i.e., treated as qualified dividends), or flat rate (i.e., treated as LT collectibles). Do these "special taxation" rules exist to reduce the SS tax, or do they exist to increase the tax for wealthy recipients (similar to AMT)?
  Reply
#3
The AARP group has a captive audience in place.  They also have a regular newsletter that addresses these sorts of issues.  Here's a starting point, guideline  for writter's submissions.  It may be best to contact them for all the possibilities.  btw...they also have various, regular petition drives that goes out to their millions of members.
 
My approach would be to write and article and follow it up within a month or so with an actual  petition.  I am sure the pros at AARP have the system down to a T.  Good luck and thanks for being pro-active.
  Reply
#4
Siobhan, Thank you for the suggestion re AARP (I'm a member, so I receive their newsletters and occasional petitions).  Interestingly, although AARP has been very vocal and lobbied on issues such as the "fiduciary rule," which is something that doesn't affect all of its members (e.g., not those of us who make all our own investing decisions), I've never heard or read anything from them about this taxation issue.
 
Regarding what you said about following up an article with a petition, is there a place on the site where one can request that a petition be started?  I couldn't find anything like that by typing "petition" in the search box (what I got was a lot of links to news items about petitions that AARP has already circulated or sent, such as to the Illinois State Legislature about the budget mess).  
 
But I certainly will start with the process of submitting a story idea.
  Reply
#5
(11-21-2018, 07:36 PM)Nate_R Wrote:
thank you for the post, and also sharing your knowledge/experience about SS in many different posts. I learnt a lot of SS-related nuances from your posts (e.g., indirect effect of tax-exempt investments on SS receipts).

 
I haven't researched SS taxation in depth, but from the bit-and-pieces of information I get from various places, I gather the impression that the SS taxation rules are very convoluted than it needs to be. The complexity/nuances are there as if people receiving SS are pursuing rocket science as post-retirement career and have lot of time that can be devoted to work through the details of the overall taxation impact!!
 
I do not fully understand why SS income isn't treated in the same way as any other income that's taxed either at regular progressive rate (i.e., treated as ordinary income), or qualified rate (i.e., treated as qualified dividends), or flat rate (i.e., treated as LT collectibles). Do these "special taxation" rules exist to reduce the SS tax, or do they exist to increase the tax for wealthy recipients (similar to AMT)?
Yes, the taxation of Social Security benefits is rather convoluted.  I think that, because a lot of people use tax-preparation software, or the free fill-in forms on irs.gov, or a paid tax preparer, they may not be aware of the mechanics of the computation.  (If you use TurboTax, as I do, you can see the actual worksheet that does the calculation for you.)
 
I think that when I first started receiving Social Security, I wasn't using any kind of tax software or a paid tax preparer, so I read through the instructions which include the worksheet that goes through the step-by-step calculations of how much of my Social Security benefits would be subject to tax -- the amount that goes on line 20b of Form 1040 (2016 version -- I just looked at my last tax return for the line number since I haven't done 2017 yet).  Then I noticed, from one year to the next, that the dollar thresholds for taxation hadn't changed, even though the regular income tax brackets were revised for inflation.  (Later, when I wanted to be able to forecast, throughout the year, what my income, deductions, and income tax would be, I constructed an Excel spreadsheet that follows the exact calculations for everything that applied to me, such as the Social Security taxation worksheet, the Qualified Dividends and Capital Gains Worksheet, Schedules A, B, and D, etc., so I could figure out the tax effect of, for example, taking a capital gain, or doing a Roth conversion, etc.  By running my own "what-if" scenarios, I could see exactly how much of an effect there was on the amount of my Social Security benefits that were taxed.)
 
Yet, because Social Security benefits ARE indexed for inflation, recipients of SS benefits experience "bracket creep", a term that was used when the regular income tax brackets weren't indexed for inflation; people whose nominal incomes increased, but whose inflation-adjusted incomes hadn't increased, nevertheless found themselves pushed into higher tax brackets so that, after paying higher taxes, they were worse off.  There was also "bracket creep" in the Alternative Minimum Tax ("AMT"), until a few years ago Congress finally acted to index it for inflation.  By the way, the maximum amount of wages that are subject to tax withholding for Social Security ("FICA" on your paycheck) IS indexed for inflation, so high earners find more of their income being withheld.
 
As to why Social Security income is taxed:  you can argue for or against it based on various theories of what is "fair" -- for example, since those of us who receive SS benefits paid into the system, one could argue that some of what we receive is a return of our own money and should not be taxed at all.  On the other hand, if you're not self-employed, you only pay half of the Social Security tax (FICA) and your employer pays the other half, so one could argue that you're receiving, essentially, deferred compensation from the employer which should be taxed.  (Self-employed people pay the entire FICA tax.)
 
However, what I recall having read is that the Social Security funds were not in good shape in the early 1980s (and maybe before that -- it probably was a growing problem), and as part of the "fix" Congress decided that at least some people who received Social Security benefits but who were fairly well-off should pay income taxes on their benefits. (Before that, SS benefits weren't taxed.)   I don't recall what the other parts of the "fix" were, but at some point, as you likely know, the full retirement age was changed from 65 for everyone to higher ages depending on one's year of birth.  Increasing the full retirement age helped slow down the outflow of cash from the Social Security "trust funds" (which are just  governmental accounting entries, not true "trust funds" in the legal sense).
 
I don't know whether this answers all of your questions.  However, I've had plenty of time to think about it, and every year when I do my taxes I feel my blood pressure rising (well, not really!) when I look at the Social-Security-tax worksheet.  I've felt helpless to do anything about it, which is why I wrote my question.
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#6
Thank you very much hodedofme, for the elaborate response. As always, it's very thorough and helpful.

 
I found some references to SS taxation, and also summary of the 1983 amendment. Again, I simply wish that the tax-code was less convoluted!

https://www.ssa.gov/history/1983amend.html

I think I can relate to your rising BP at tax-time . We get the same feeling as each additional $ produces diminishing after-tax value (due to reduced deduction/exemption).
  Reply
#7
(12-01-2018, 03:39 AM)norabird Wrote: Thank you very much hodedofme, for the elaborate response. As always, it's very thorough and helpful.

I found some references to SS taxation, and also summary of the 1983 amendment. Again, I simply wish that the tax-code was less convoluted!

https://www.ssa.gov/history/1983amend.html

I think I can relate to your rising BP at tax-time . We get the same feeling as each additional $ produces diminishing after-tax value (due to reduced deduction/exemption).

Thank you for the suggestion re AARP (I'm a member, so I receive their newsletters and occasional petitions).  Interestingly, although AARP has been very vocal and lobbied on issues such as the "fiduciary rule," which is something that doesn't affect all of its members (e.g., not those of us who make all our own investing decisions), I've never heard or read anything from them about this taxation issue.
 
Regarding what you said about following up an article with a petition, is there a place on the site where one can request that a petition be started?  I couldn't find anything like that by typing "petition" in the search box (what I got was a lot of links to news items about petitions that AARP has already circulated or sent, such as to the Illinois State Legislature about the budget mess).  
 
But I certainly will start with the process of submitting a story idea.

(11-21-2018, 07:36 PM)Nate_R Wrote: thank you for the post, and also sharing your knowledge/experience about SS in many different posts. I learnt a lot of SS-related nuances from your posts (e.g., indirect effect of tax-exempt investments on SS receipts).
 
I haven't researched SS taxation in depth, but from the bit-and-pieces of information I get from various places, I gather the impression that the SS taxation rules are very convoluted than it needs to be. The complexity/nuances are there as if people receiving SS are pursuing rocket science as post-retirement career and have lot of time that can be devoted to work through the details of the overall taxation impact!!
 
I do not fully understand why SS income isn't treated in the same way as any other income that's taxed either at regular progressive rate (i.e., treated as ordinary income), or qualified rate (i.e., treated as qualified dividends), or flat rate (i.e., treated as LT collectibles). Do these "special taxation" rules exist to reduce the SS tax, or do they exist to increase the tax for wealthy recipients (similar to AMT)?

es, the taxation of Social Security benefits is rather convoluted.  I think that, because a lot of people use tax-preparation software, or the free fill-in forms on irs.gov, or a paid tax preparer, they may not be aware of the mechanics of the computation.  (If you use TurboTax, as I do, you can see the actual worksheet that does the calculation for you.)
 
I think that when I first started receiving Social Security, I wasn't using any kind of tax software or a paid tax preparer, so I read through the instructions which include the worksheet that goes through the step-by-step calculations of how much of my Social Security benefits would be subject to tax -- the amount that goes on line 20b of Form 1040 (2016 version -- I just looked at my last tax return for the line number since I haven't done 2017 yet).  Then I noticed, from one year to the next, that the dollar thresholds for taxation hadn't changed, even though the regular income tax brackets were revised for inflation.  (Later, when I wanted to be able to forecast, throughout the year, what my income, deductions, and income tax would be, I constructed an Excel spreadsheet that follows the exact calculations for everything that applied to me, such as the Social Security taxation worksheet, the Qualified Dividends and Capital Gains Worksheet, Schedules A, B, and D, etc., so I could figure out the tax effect of, for example, taking a capital gain, or doing a Roth conversion, etc.  By running my own "what-if" scenarios, I could see exactly how much of an effect there was on the amount of my Social Security benefits that were taxed.)
 
Yet, because Social Security benefits ARE indexed for inflation, recipients of SS benefits experience "bracket creep", a term that was used when the regular income tax brackets weren't indexed for inflation; people whose nominal incomes increased, but whose inflation-adjusted incomes hadn't increased, nevertheless found themselves pushed into higher tax brackets so that, after paying higher taxes, they were worse off.  There was also "bracket creep" in the Alternative Minimum Tax ("AMT"), until a few years ago Congress finally acted to index it for inflation.  By the way, the maximum amount of wages that are subject to tax withholding for Social Security ("FICA" on your paycheck) IS indexed for inflation, so high earners find more of their income being withheld.
 
As to why Social Security income is taxed:  you can argue for or against it based on various theories of what is "fair" -- for example, since those of us who receive SS benefits paid into the system, one could argue that some of what we receive is a return of our own money and should not be taxed at all.  On the other hand, if you're not self-employed, you only pay half of the Social Security tax (FICA) and your employer pays the other half, so one could argue that you're receiving, essentially, deferred compensation from the employer which should be taxed.  (Self-employed people pay the entire FICA tax.)
 
However, what I recall having read is that the Social Security funds were not in good shape in the early 1980s (and maybe before that -- it probably was a growing problem), and as part of the "fix" Congress decided that at least some people who received Social Security benefits but who were fairly well-off should pay income taxes on their benefits. (Before that, SS benefits weren't taxed.)   I don't recall what the other parts of the "fix" were, but at some point, as you likely know, the full retirement age was changed from 65 for everyone to higher ages depending on one's year of birth.  Increasing the full retirement age helped slow down the outflow of cash from the Social Security "trust funds" (which are just  governmental accounting entries, not true "trust funds" in the legal sense).
 
I don't know whether this answers all of your questions.  However, I've had plenty of time to think about it, and every year when I do my taxes I feel my blood pressure rising (well, not really!) when I look at the Social-Security-tax worksheet.  I've felt helpless to do anything about it, which is why I wrote my question.
  Reply
#8
Convoluted doesn't even begin to describe the taxation system!!!!! Because I file a married but filing separate return 85% of my SS is taxable regardless of the amount of income.
 
I also have a very negative outlook on Congress being able to accomplish much of anything good for the people. When you have not a single Democrat voting for the tax reform.....Something is very wrong with all the politicians that it is more important to oppose the other party rather than try to accomplish something good for the people. It is not like there is any shortage of intelligent people in this country. Many of the problems can solved with some simple math. But, It is going to take the will of Congress to serve the people first and the political parties second, instead of the other way around.
 
I applaud your initiative to try and change things, but, I think the only thing that ever gets their attention is when several millions of people show up with some protest music as well, and camp out in Washington until they take specific actions to address specific problems.
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#9
I suspect that Congress knows that several millions of elderly people probably won't descend on Washington to protest the Social Security taxation regime, and thus does nothing to help us.
  Reply
#10
I agree with this thread.
 
SS tax is not only onerous and punitive, it's fundamentally unfair to people who worked and saved and maybe even started a side business before and into their retirement years. People the USA should be rewarding.
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