Help me understand how Social Security works. The way I understand it is that I give the government $10 dollar from my paycheck and then the government gives it back to me when I am done working… I don’t understand how is that income?
There is no relationship between the payroll tax and the benefits you, a spouse, a child, an ex-spouse or survivor may collect. Funding is a tax, benefits are part of a separate law. One can and has been changed without regard to the other.
Millions of Americans collect SS benefits never having paid a penny in taxes.
What you pay in social security “tax” is before income taxes. So it’s the same as you purchasing an annuity with pre-tax income. That annuity would then be taxable when you receive those payments, because that’s when it becomes income.
It seems fair to me, since we don’t know what we’ll get out of SS, income taxing it on the back end so that recipients get that burden is logical.
i think no tax on SS benefits makes as much sense as no tax on tips or no tax on income but replaced by tariffs as has been proposed as a concept of an idea. I hope that the current congress, now that one party holds all the power, can get our fiscal house in order.
If history is any indication, don’t hold your breath. When one party holds all the levers of power the outcome is usually bad. We have checks and balances for a reason.
I expect this like no taxes on tips will just fade into oblivion. But if it happens we should all just add some amount into our inflation projections and assume that you need to have more equities less fixed income.
Let’s just do the reasonable thing to Social Security taxation that could actually pass in a bipartisan way. The income limits prior to taxation of Social Security should be updated with inflation from 1983 to date. This would help protect those most vulnerable from paying the tax and allow the taxation to continue for those most able to pay the taxes. The current 25,000 to 34,000 threshold would be inflation adjusted to 79,000 to 107,000 for a single filer. 101,000 to 139,000 when filing a joint return. Don’t eliminate the tax, just make it inflation adjusted like most of the common tax brkts.
So if I averaged $40K a year income throughout my working life and my neighbor averaged $60K, at some point my lower benefits will be taxed and his higher benefits won’t, because I reach that threshold before he does? Am I understanding that correctly? Or have I misunderstood?
taxed based on what was not taxed previously like any investment, but in your example likely taxed at lower rate or more likely no taxes actually payable at lower income levels. Meanwhile the lower income person benefits from the SS benefit formula provided higher benefit relative to earnings.
But it isn’t like other income, you paid dedicated taxes for it similar to a contributory pension or an after tax purchased annuity. You pay tax on the portion based on earnings or paid by someone else.
As far as I am concerned, income is income. The tax code would be a whole lot simpler if we treated all income the same. Why should I pay tax on my DB pension when someone else doesn’t pay it on a DC pension (which I hadn’t actually known)? I contributed to my pension in the form of foregone salary I would otherwise have received.
It’s also not clear to me that the tax formula for SS does what you just claimed it does.
Gee whiz Richard, when you put it that way, the current income thresholds don’t seem all that bad. If you think about it, they are sort of like an extension of the standard deduction for retired taxpayers at the low end of the economic scale.
Just for what it’s worth, an old tax client told me they were very excited about the prospect of no longer paying taxes on their SS. I had to break it to them that they have never paid that tax. I suspect that there are many who fall into that category.
We better hope it doesn’t happen. The income taxes paid on SS benefits contribute $50 billion a year to the SS trust and additional billions to Medicare Part A trust.
We should be asking who will pay and how to make up that loss let alone the already existing shortfall.
The fixed income thresholds used to be a tax pet peeve of mine until I learned that all of those taxes go into the trust fund. It would be irresponsible to make any cuts to funding without implementing a “fair” alternative plan to put SS on solid ground at the same time. And for the record, those taxes affect me too. But hey, maybe someone has a concept of a plan that I haven’t heard about yet.
Medicare scams last year (2023) cost the system 31.2 billion given to the scammers. The 50 billion SS trust money seems small when compared to the other leaks in the system. There are ways to support the trust without using non-inflation adjusted tax brackets. I agree eliminating is a mistake, but a more fair system would be welcomed.
While I don’t have a problem with increasing the amount of my taxable SS income from 85% to 100%, I am not in favor of any option that would tax the SS income of those who curently don’t make enough to pay SS taxes–even after they have recouped what they paid in payrolll taxes.
I agree with comments already made and I’ll add this point; folks with the means and wherewithal to have Roth conversions as part of their overall strategy, are minimally impacted by these gimmick tax rules. Won’t chmagey midlife or financial strategy one way or the other.
If it does happen it could be a benefit to some people desiring to do Roth conversions. However, I’m with Ormode below. It would hasten the depletion of the trust fund. We need to find ways to strengthen Social Security, not destroy it.
At 77 it will simply mean my income will increase. While that would be welcome on a personal level, I doubt it is sound government policy. I do not have a reflex objection to taxation, I see it as necessary for a civil society. I also could get concerned about the size of the national debt.
I agree, it would add a couple thousand bucks to my savings, but not affect my spending. My experience doing taxes is that the retirees who could use some extra money are already not paying tax on SS.
Help me understand how Social Security works. The way I understand it is that I give the government $10 dollar from my paycheck and then the government gives it back to me when I am done working… I don’t understand how is that income?
There is no relationship between the payroll tax and the benefits you, a spouse, a child, an ex-spouse or survivor may collect. Funding is a tax, benefits are part of a separate law. One can and has been changed without regard to the other.
Millions of Americans collect SS benefits never having paid a penny in taxes.
What you pay in social security “tax” is before income taxes. So it’s the same as you purchasing an annuity with pre-tax income. That annuity would then be taxable when you receive those payments, because that’s when it becomes income.
It seems fair to me, since we don’t know what we’ll get out of SS, income taxing it on the back end so that recipients get that burden is logical.
Also, the government gives that $10 to a current retiree. The $10 you receive when you retire comes from a then current worker.
I was only trying to explain the tax logic. How they work the money doesn’t change the tax implications.
The government doesn’t give a penny to anyone.
It puts my SS in my bank account. As far as I’m concerned that’s “giving”. YMMV.
I don’t know. People don’t like the “T” word. Maybe eliminate the tax along with a one time reduction in benefits.
i think no tax on SS benefits makes as much sense as no tax on tips or no tax on income but replaced by tariffs as has been proposed as a concept of an idea. I hope that the current congress, now that one party holds all the power, can get our fiscal house in order.
If history is any indication, don’t hold your breath. When one party holds all the levers of power the outcome is usually bad. We have checks and balances for a reason.
I expect this like no taxes on tips will just fade into oblivion. But if it happens we should all just add some amount into our inflation projections and assume that you need to have more equities less fixed income.
Let’s just do the reasonable thing to Social Security taxation that could actually pass in a bipartisan way. The income limits prior to taxation of Social Security should be updated with inflation from 1983 to date. This would help protect those most vulnerable from paying the tax and allow the taxation to continue for those most able to pay the taxes. The current 25,000 to 34,000 threshold would be inflation adjusted to 79,000 to 107,000 for a single filer. 101,000 to 139,000 when filing a joint return. Don’t eliminate the tax, just make it inflation adjusted like most of the common tax brkts.
Why not just tax SS once the total benefits received exceed the total taxes paid by worker?
Because that is not the law passed in 1983. It is easier to work within the framework of existing law than trying to scrap the entire law.
To make SS solvent will require a number of changes not in current law.
So if I averaged $40K a year income throughout my working life and my neighbor averaged $60K, at some point my lower benefits will be taxed and his higher benefits won’t, because I reach that threshold before he does? Am I understanding that correctly? Or have I misunderstood?
taxed based on what was not taxed previously like any investment, but in your example likely taxed at lower rate or more likely no taxes actually payable at lower income levels. Meanwhile the lower income person benefits from the SS benefit formula provided higher benefit relative to earnings.
The tax code is already way too complicated. Either treat SS benefits like any other income, or don’t tax it at all, but no more formulas.
But it isn’t like other income, you paid dedicated taxes for it similar to a contributory pension or an after tax purchased annuity. You pay tax on the portion based on earnings or paid by someone else.
As far as I am concerned, income is income. The tax code would be a whole lot simpler if we treated all income the same. Why should I pay tax on my DB pension when someone else doesn’t pay it on a DC pension (which I hadn’t actually known)? I contributed to my pension in the form of foregone salary I would otherwise have received.
It’s also not clear to me that the tax formula for SS does what you just claimed it does.
Gee whiz Richard, when you put it that way, the current income thresholds don’t seem all that bad. If you think about it, they are sort of like an extension of the standard deduction for retired taxpayers at the low end of the economic scale.
It might have been good political strategy but would be a terrible idea to implement. IMO, it would be financially irresponsible.
Agree 100%
I would imagine it would theoretically only apply to lower income earners.
If you are really low income you already pay no tax on SS benefits. See here.
When reviewing how low those income levels are, one should hope they are in the 85% taxable Social Security level.
Just for what it’s worth, an old tax client told me they were very excited about the prospect of no longer paying taxes on their SS. I had to break it to them that they have never paid that tax. I suspect that there are many who fall into that category.
We better hope it doesn’t happen. The income taxes paid on SS benefits contribute $50 billion a year to the SS trust and additional billions to Medicare Part A trust.
We should be asking who will pay and how to make up that loss let alone the already existing shortfall.
The fixed income thresholds used to be a tax pet peeve of mine until I learned that all of those taxes go into the trust fund. It would be irresponsible to make any cuts to funding without implementing a “fair” alternative plan to put SS on solid ground at the same time. And for the record, those taxes affect me too. But hey, maybe someone has a concept of a plan that I haven’t heard about yet.
Medicare scams last year (2023) cost the system 31.2 billion given to the scammers. The 50 billion SS trust money seems small when compared to the other leaks in the system. There are ways to support the trust without using non-inflation adjusted tax brackets. I agree eliminating is a mistake, but a more fair system would be welcomed.
How about paying taxes on full SS benefits once you have recouped in benefits all you paid in payroll taxes toward SS?
How about paying them at capital gain rates?
While I don’t have a problem with increasing the amount of my taxable SS income from 85% to 100%, I am not in favor of any option that would tax the SS income of those who curently don’t make enough to pay SS taxes–even after they have recouped what they paid in payrolll taxes.
Millions are paying the tax now that didn’t in 1983 due to inflated dollars and no inflation adjustment of the tax brkts for Social Security taxes.
I agree with comments already made and I’ll add this point; folks with the means and wherewithal to have Roth conversions as part of their overall strategy, are minimally impacted by these gimmick tax rules. Won’t chmagey midlife or financial strategy one way or the other.
For me, I will wait for any tax law changes to be enacted before I worry about about how I might react.
I am also in the club that feels the national debt is a critical issue for our country to address.
I agree but fear that it will only happen under a crisis where interest rates skyrocket and financial markets drop significantly.
Yes, why do today what can’t be put off till tomorrow.
If it does happen it could be a benefit to some people desiring to do Roth conversions. However, I’m with Ormode below. It would hasten the depletion of the trust fund. We need to find ways to strengthen Social Security, not destroy it.
100% not going to happen – such a bill would never get through Congress.
I have noticed that it is no longer being talked about…. So maybe it will fade away.
At 77 it will simply mean my income will increase. While that would be welcome on a personal level, I doubt it is sound government policy. I do not have a reflex objection to taxation, I see it as necessary for a civil society. I also could get concerned about the size of the national debt.
I agree, it would add a couple thousand bucks to my savings, but not affect my spending. My experience doing taxes is that the retirees who could use some extra money are already not paying tax on SS.