Hazard for Boomers: Tax on Social Security
Last month I wrote about efforts in Congress to adjust the alternative minimum tax for inflation to keep that levy, originally intended for millionaires, from hitting middle-income taxpayers.
There’s another large group of taxpayers getting slammed by inflation: seniors. The tax on Social Security income has not been adjusted for inflation since it was enacted 23 years ago.
But unlike the alternative minimum tax, which has caused an uproar because it has started to affect those earning less than $100,000, this hitch in the tax code is getting almost no attention.
The law, aimed at taxing a portion of Social Security benefits for “high income” filers, already affects millions of middle-income seniors, who each pay thousands of dollars in additional tax as a result of it. And as baby boomers edge closer to retirement, it’s certain to ensnare millions more, said Mark Luscombe, principal tax analyst with CCH Inc., a Riverwoods, Ill.-based publisher of tax information.
The tax on Social Security benefits is triggered when a senior’s wage, pension, investment and dividend income exceeds a set threshold. At that point, a senior who fills out a return by hand must complete an 18-line worksheet that ultimately determines how much of his or her otherwise tax-free Social Security benefits will become taxable. (Most tax software programs do the calculation automatically, so those who file that way may not even notice the extra tax.)
For a single senior, each dollar of income over $25,000 makes 50 cents of his or her Social Security benefits taxable. For married couples, that threshold is $32,000.
The tax accelerates above income levels of $34,000 for singles and $44,000 for married couples, when each new dollar of income makes 85 cents of benefits taxable.
“It’s diabolical,” said Lonell Spencer, a 77-year-old retiree from Arcadia. “Every dollar you make above the threshold isn’t taxed as $1; it’s taxed as $1.50 or $1.85.”
What’s more, half of a senior’s Social Security benefits are figured into the income threshold. So a senior with $25,000 in annual Social Security income would have $12,500 of that added into his total income level, meaning that if he earned only $13,000 in other income his government retirement benefits would become taxable.
Seniors also note that double taxation is built into the law.
Blake Heffner, a retiree from Hellertown, Pa., complains that if he made a sage investment that generated a $1,000 capital gain, he’d end up paying for it twice. First, he’d pay a 15% tax on the capital gain. But that gain would push $500 to $850 of his Social Security income into the taxable column too. In the end, he’d pay $225 to $277 in taxes on the $1,000 gain, even though he’d still be in the 15% bracket.
Worse still, said Spencer, is that though the federal government has taken great pains to eliminate so-called marriage penalties in the tax code for most filers, the marriage penalty still slams seniors. That’s because the thresholds for taxing Social Security income for married couples are only slightly higher than the thresholds for singles.
“It’s galling that they have a marriage penalty for seniors, when they’ve addressed it for everyone else,” he said.
Social Security benefits were tax free for nearly 50 years. The law was changed in 1983 because the Social Security system was underfunded. The idea was that revenue from taxing benefits of “wealthy” recipients would go back into the trust fund and make it solvent.
What seniors including Spencer and Heffner are grousing about is not the logic behind the tax but the thresholds at which it strikes.
Since 1983, inflation adjustments have more than doubled the standard deduction and write-offs for personal exemptions. If the thresholds for the tax on Social Security had similarly been adjusted, benefits wouldn’t be taxable until income exceeded $50,000.
“It irks me every Sunday when I look at the current consumer price index,” Spencer said.
His buying power has been cut in half since 1983, the retired machinist said, and yet he’s still taxed as if he were wealthy.
Senior activists are redoubling their efforts to get Congress to do something about the taxation of Social Security benefits.
“I’m trying to get some other seniors who are paying the tax to bombard their legislators with letters about it,” Heffner said. “I would like to see somebody take up our cause.”
But experts say it’s an uphill climb. More than $14.5 billion in revenue is collected through the taxes each year. That’s only a fraction of the $472 billion that comes in annually from payroll taxes, but legislators say it’s too much money to give up in light of projected shortfalls in Social Security funding.
An effort was made about five years ago to adjust the income thresholds to inflation, but the bills died in committee. Nothing has been introduced since, and even officials at AARP, a lobbying group for seniors, said they’d given up fighting the tax.
“I can’t tell you why there hasn’t been a hue and cry about this,” Luscombe said. “Maybe it’s just because the baby boomers aren’t quite old enough to be affected by it yet.”
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Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For previous columns, visit latimes.com/kristof.
