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Periodic Contributor

SS Provisional Tax Should be Indexed to Inflation

Is AARP or any organization doing anything to support making inflation adjustments to the provisional income tax on social security benefits, similar to the action congress takes on the AMT (Alternative Minimum Tax) each year?

 

When the Provisional Income Tax was created for Social Security Beneficiaries in 1983, Congress intended for it to be paid by only the top 10% of beneficiaries.  However, it was not indexed to inflation.  As a result, it’s estimated that 60% or more of beneficiaries are now paying the tax that  congress had intended for only the top 10%.   

 

Considering the annual inflation adjusted changes congress makes to the AMT, I think they should be doing the same thing for the Provisional Tax on Social Security benefits.

 

This seems like an issue that AARP should be leading on if they aren't already. 

 

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Bronze Conversationalist

@ThomasK336865 I agree that the current thresholds are not realistic based on almost 40 years of increases in real income and/or cost of living (inflation) adjustments. SS Benefits have increased, but the thresholds have not increased. So, more and more SS Beneficiaries are exceeding the thresholds and incurring Federal Income Taxes (FIT) on their taxable SS Benefits. It should be noted that Federal tax rates (i.e., 10%, 12%, 22%, etc.) exceed current FICA tax rates (7.65%). For the folks that report 85% of their SS Benefits as taxable income, many would incur less FIT if they just incurred FICA tax rates on their SS Benefits. For example, a single receives SS Benefits of $24,000 and has other income that exceeds the 85% threshold. That person incurs $2,448 in FIT if his/hers tax rate is 12% ($24,000 X .85 X .12). The FIT will be greater if the tax rate is more than 12% (i.e., 22%, 24%, etc.). If he/she paid the current FICA rate of 7.65% on all SS Benefits, the tax would be only $1,836 ($24,000 X .0765). So, by assessing FIT rates instead of FICA rates as an example, many folks that exceed the 85% threshold are, in effect, getting their SS Benefits "cut". I am providing a link  Research Note # 12 Taxation of SS Benefits which is from the SS website https://www.ssa.gov/history/taxationofbenefits.html The 1983 thresholds were created to not effect the lower income individuals. Since, those thresholds were intentionally not indexed, over time, the thresholds would lose some of their threshold effect as increases in real income or inflation would tend to pull more and more folks into tax liability. They were not intended for just 10% of SS Beneficiaries. I suggest reading the history of this taxation especially the summary of the 1979 Advisory Council aka Greenspan Commission. In the 5th paragraph, click on the actual Report (should be highlighted in blue) for the details. The summary of the 1983 Amendments points out that by 1993 when the rules were amended again, about 18% of SS Beneficiaries were incurring FIT liability. I suppose the thresholds from 1983 provided the desired increase in FIT revenue, Congress introduced the 85% threshold to increase more FIT revenue. Yet, the FICA rate on wages, salary, etc. (7.65%) has been the same since 1990.    

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I agree. This issue effects more retirees then prescription drug prices. AARP should have a lobbing effort to address this like the did with prescription drug prices. I am sure that there are millions of people on Social Security that hit the 85% threshold every year.   

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