Wednesday, August 25, 2010

Social Security Modernization: Part 3

By Scott Burns

Which of these tax bills would you rather pay?

a. $0
b. $610
c. $2,004

This is not a trick question. The historical role of taxes as the price of civilization notwithstanding, most people will go for answer (a) because most of us have a deep inner belief that taxes are best when paid by someone else.

In fact, (c) is the amount a nicely Solvent Senior would pay on 2009 income from various sources under current tax law. The other answers, (a) and (b), are what the same Solvent Senior would pay if there were such a thing as an honest politician. I got these figures by doing some woulda-coulda testing for a reader who wanted to know how the taxation of Social Security benefits affected his tax bill. I thought you might like to know.

The retired couple had combined Social Security benefits of $50,000 a year. They get this much because both worked and both earned and contributed more than most people. They also had $12,000 in pension income, $15,000 in IRA distributions and $12,000 in Roth IRA distributions. So their total retirement cash income is $89,000.

That’s a nice total. Lots of retirees and working stiffs would happily change places with them. Even so, they are among the 52 percent of retired couples who derive at least 50 percent of their income from Social Security. They are a long way from Fat City.

Now let’s look at the three possible tax bills.

Current Law. Under current law, $12,000 of Roth IRA income isn’t counted. But their other $27,000 of pension and IRA income causes $12,800 of their Social Security benefits to be added to their taxable income. This gives them a taxable income, before deductions and exemptions, of $39,800. After the standard deduction, elderly deduction and two personal exemptions totaling $20,900 their taxable income is $18,900. Their federal income tax bill is $2,004 the TurboTax program tells me.

Current Law with indexation of Social Security benefits taxation. When the weasels in Washington decided to tax Social Security benefits in 1983 they knew it would be unpopular. So they finessed the conflict. They set a high threshold that was not indexed to inflation. Basically, they put a slow burning fuse on a bomb timed to go off well after they were out of office. The first threshold number for couples is $32,000. The second is $44,000. Plug those numbers in the Bureau of Labor Statistics online inflation calculator and the inflation adjusted numbers would now be $68,927 and $94,775, respectively.

That’s why I don’t think it’s rude to call these jokers weasels.

If the taxation formula were adjusted for inflation this couple would not have to include any Social Security benefits in their taxable income. Their taxable income would be $6,100. Their tax bill would be $610, and the politicians of 1983 wouldn’t have made President Franklin Delano Roosevelt into a liar. (He’s the one who promised Social Security benefits would never be taxed.)

Under promised Obama law. While a candidate, President Obama offered a “Comprehensive Tax Plan” that included eliminating income taxes for seniors with income under $50,000. Under current tax law, the income before deductions and exemptions for this couple would have been the $39,800 cited earlier. So their tax bill would have been $0 if the President kept his word. The President is being quite fastidious about increasing taxes for those with incomes over $250,000, but he has forgotten his promise to cut taxes for seniors.

No comments:

Post a Comment