Repeal and Replace The Double Taxing of Social Security Benefits IRS Form 1040 Line 20b Disability lacing the with a new Tax Provide a Uniform Tax at a Lower Rate Include More Tax Payers Have a Goal of Providing a Revenue Neutral Change Double Taxing of Social Security
Help President Trump Repeal the Senior Ci zens Tax : Repeal the double taxing of Social Security Benefits a er re rement, called the Senior Ci zen Tax. Double taxa on creates a Tax Bubble and causes marginal tax rates to go as high as 48% even though the income is in the 15% Federal bracket. Only 7 states include this tax in the state tax calcula on. Minnesota is one of them but star ng in 2017 subtrac ons will be applied with limita ons based on income. The Federal Tax needs to be repealed which would also eliminate it at the state level. The First Tier Tax, (Tier 1) was signed into law by President Reagan in 1983 (up to $6,000 or 50% of Social Security Benefits became taxable) crea ng a Tax Bubble with increased tax revenue going to the Social Security Trust Fund. The Second Tier (Tier 2) por on, was signed into law by President Clinton in 1993 (from $6,001 to 85% of Social Security Benefits became taxable), caused a double tax, because while employees were working they already paid income taxes on the earned income. The extra tax revenue goes to the Medicare Trust Fund. When Social Security Benefits started being paid out they were all tax free. Senior Ci zens Tax Causes a Tax Bubble: You can see in Figure 1 what effect the Senior Ci zens Tax has on re rees. The graph compares a re red employee receiving Social Security Benefits and paying the Senior Ci zen Tax to the same re red employee with the Senior Ci zen Tax repealed. In the example; marginal rates are calculated by increasing part me employment income by $1,000 increments and comparing increased taxes to increased income. Compounding Creates the Tax Bubble: Re rees receiving Social Security Benefits have their taxable income compounded when income increases. For example: When a married couple receives $21,000 Taxable Pension payments plus $32,184 Social Security Benefits (based on $1,341, the average monthly Social Security Benefit) they needed more income so they both con nued working part- me. In the sample calcula- on used in Figure 1 a series of calcula ons were made based on $1,000 increments of part- me income (part me jobs for husband & wife), then increased income is compared to increased taxes. When their part- me income reached $32,100, their taxable Social Security compounded taxable income by $27,356, which is 85% of the $32,184 total Social Security Benefits, see Figure 1 Taxable Social Security. The Gross Income compounded by $27,356 from $53,100 to $80,456 (Line 5 of Table 1). The compounding causes total marginal tax rates to go over 48%. You can check to see if you are paying this tax, by checking Line 20b of your IRS 1040 Form. If you have a value over 0, you are in a Senior Ci zen Tax Bubble caused by compounding of the amount of Taxable Income. 1
Jurisdictional Marginal Tax Rates: See Figure 2: it shows Marginal (MN State Tax and Federal Tax Rates) plus the combined rates. Note that maximum MN State Rate is 13.0%; Federal Tax Rate is 35.4% for a combined total of 48.4%. When taxable Social Security reaches 85% of total Social Security Benefits, the Tax Bubble stops. Even though the Marginal Tax Rate goes down to the Tax Bracket rates, the Bubble caused a total increase of $5,981 including Federal and MN State Taxes. Senior Ci zen Tax Causes $5,981 Increase in Taxes: Figure 3 shows a comparison between re rees receiving Social Security Benefits with the tax repealed, to the same re rees paying the Senior Ci zen Tax. The graph represents a re red married couple receiving $32,184 Social Security Benefits (based on $1,341, the average monthly Social Security Benefit); $21,000 Taxable Pension plus they con nued working and earned an addi onal $32,100 income and filed taxes jointly. Bar 1 represents taxes paid with the Senior Ci zen Tax repealed. Bar 2 represents the total taxes paid including the Senior Ci zen Tax under exis ng laws. A er re rement the couple con nued working part- me at a Social Security paying employer and paid Social Security Payroll Taxes. See Table 1 Note the extra tax amounts (Senior Ci zen Social Security Tax = $900; Senior Ci zen Medicare Tax = $3,203) totaling $4,103. Total Income Taxes including MN State taxes of $3,617 amounted to $11,673, compared to $5,691 if the tax was repealed; the exis ng laws (Line 20b of the Federal IRS Form 1040) caused a 105% increase in income taxes. In addi on the couple paid $2,456 in (FICA Payroll taxes) based on $32,100 part- me wages, totaling $14,128. 2
Social Security Disability Benefits: Disability Benefits received are also subject to this same double taxa- on. It is perplexing to understand why people that are in need and apply for help would be subject to ge ng double taxed. This is a perfect example of government deliberately applying a poor tax, which makes the poor poorer. This double taxa on needs to be repealed. Exempt Employees Get a Free Ride: Even though re red employees that were exempt from being on the Social Security System (like FERS, PERA, and CMS Re rees) receive Medicare Benefits, they do not have to pay a dime of double taxes to the Medicare Trust Fund a er Re rement. This makes the Senior Ci zen Tax Uncons tu onal because the tax is not uniform to all recipients receiving Medicare Benefits. Social Security & Medicare Taxes Paid in Do Not Get Recorded: A er paying extra Social Security Taxes for a few years a er re rement, I went to the Social Security Office and asked if the tax payments were ge ng credited to my account and they said, NO. I asked why, and they said it was not their job to do that but it was the IRS s job to calculate the tax amount. I called the IRS and they said, NO. It was the Social Security Administra on s job. A er several itera ons back and forth between the agencies, I received a call from the IRS and was told I should calculate the amounts myself and submit them to the Social Security Administra on. They would record the informa on in my account. It took me awhile to figure out how to make the calcula on, but I did. The informa on was submi ed to the Social Security Administra on, but they never recorded it nor did they ever respond to me. Several years have gone by without a response. I called the Social Security Administra on again last fall and was told the reason the informa on was not recorded is because the Social Security Administra on Staff was not properly trained. In a recent call with the Social Security Administra on, I was informed that a new form should be created by the IRS, so taxpayers could report the informa on to the IRS. Informa on would be transferred from the IRS to the Social Security Administra on for recording. Time will tell if this works. Uncons tu onal Rates: In the Tax example discussed in this report Tier 1 and Tier 2 are taxed at the Federal taxable income rate of (15%) rather than the legal tax rates. See below: -Social Security tax rate is 6.2% compared to 15% which is 2.4 times larger. -Medicare tax rate is 1.45% compared to 15% which is 10.3 times larger. -Note: (Column 1 Line 13) of Table 1 Federal Medicare Tax Via the Senior Citizen Tax is $3,203, which is equivalent to $220,928 in payroll taxes @ 1.45%. This is in addition to the $465 (Column 1 Line 19) of Table 1 already paid into Medicare due to $32,100 in part-time wages. This is the Tier 2 portion of the double tax that was promoted by President Bill Clinton and signed into law by President Clinton. 3
Repealing and Replacing Tier1 and Tier 2 of the Senior Ci zen Tax Is a Viable Solu on The Repeal: President Trump s Tax Proposal - GOP s Postcard proposal does not repeal the Senior Ci zen Tax at this me. When it is repealed the Social Security and Medicare Trust Funds would receive less revenue. Senators and Representa ves please work together and pass Tax Reform!!!! The Replacement: Exis ng laws provide supplementary income for the Social Security and Medicare Trust Funds, but they appear uncons tu onal and at extremely high rates. Why should over 50% of exis ng re rees receiving Social Security Benefits pay up to a 35% Marginal Federal Tax Rate, matching the highest rate proposed by President Trump and the GOP for the wealthy, looks like a poor tax to me. Proposed Revisions to Exis ng Laws - Keep payroll Tax Rates for Tier 1 at 6.2 % and Tier 2 at 1.45%. Provincial Income would no longer be used as a basis but would be replaced with Taxable Income. Rather than taxing just some Social Security Benefit recipients, all employees, re rees and Social Security Exempt employees in the range would be taxed. A combined average tax rate of ((6.2% +1.45%)/2)=3.825% would be used for the ranges with revenue going 50% to the Social Security Trust Fund and 50% going to the Medicare Trust Fund. Social Security Exempt employees and re rees pay 1.45% going to the Medicare Trust Fund. See the table below. Range Tax Rate From To Tax Revenue Goes to All SS Par cipants - Single 3.83% $75,000 $175,000 Social Security & Medicare Trust Funds All SS Par cipants - Married Filing Jointly 3.83% $150,000 $250,000 Social Security & Medicare Trust Funds SS Exempt Employee - Single 1.45% $75,000 $175,000 Medicare Trust Fund SS Exempt Employee - Married Filing Jointly 1.45% $150,000 $250,000 Medicare Trust Fund - OR - Proposed Sales Tax On Materials - A er repealing the double taxa on on Social Security Benefits, a new two group tax would be implemented. Group A would be a 0.5% Tax on made in USA purchases; Group B would be a 1% Tax on made in foreign country purchases. Tax Revenue would be transferred 50% into the Social Security Trust Fund and 50% into the Medicare Trust Fund. The Tax would only apply to new purchases so it would not be considered a value added tax. There would be no tax on prescrip on Drugs. The Tax would be paid by all USA residents and non-residents. For Example: With a new house purchase, the tax would only apply to house materials purchased by the Building Contractor, not on the labor to build it. If you buy a new car made in the USA the Group A Tax would apply to the materials, but if it is a foreign made car Group B Tax would apply to the purchase price. Donald Davenport Country Consul ng LLC 4
Table 1 - Sample Tax Calcula on Data - 1 - - 2 - Re red Re red Senior Ci zen Paying Tax Senior Ci zen # Descrip on Repealed TAX 1 (7) Wages, salaries, ps, etc. $32,100 $32,100 2 (16b) Taxable Pension Income $21,000 $21,000 3 (20a)Total Social Security Benefits $32,184 $32,184 4 (20b) Taxable Social Security $27,356 5 (38) Gross Income $53,100 $80,456 6 40a Schedule A Deduc ons $7,300 $7,300 7 (40b) Standard Deduc on $12,600 $12,600 8 40 Standard or Itemized deduc ons $12,600 $12,600 9 (42) Exemp ons ($4,000 per person) $8,000 $8,000 10 (43) Taxable Income $32,500 $59,856 11 (44) Federal Income Tax (Excluding Senior ci zen Tax) $3,953 $3,953 12 Fed. Social Security Tax Via Senior Ci zen Tax $900 13 Fed Medicare Tax Via Senior Ci zen Tax $3,203 14 Sub-Total Senior Ci zen Tax $4,103 15 (44) Federal Income Tax (including Senior Ci zen Tax) $3,953 $8,056 16 Minnesota State Tax $1,739 $3,617 17 Total Income Taxes (including Federal & MN State) $5,691 $11,673 18 Fed Social Security Tax on Wages ($32,100) $1,990 $1,990 19 Fed Medicare Tax on Wages ($32,100) $465 $465 20 Sub-Total Fed Payroll Tax on Wages $2,456 $2,456 21 Total Taxes (Income Plus Payroll) $8,147 $14,128 Based on 2015 Federal and Minnesota tax rates - Married Filing Jointly Remember A fine is a tax for doing wrong And A tax is a fine for doing well And A Senior Ci zen Tax is nonsense 5