Ask the Advisor: Tax on Social Security Benefits

Send this article to a friend.

Printer friendly version.

Ask the Advisor: Tax on Social Security Benefits

I think the punitive “Clinton Tax” of 85% on Social Security benefits is an issue of great importance to seniors. For some reason I don’t hear any mention of it at all! Can you please let us know why this is so and if anything is being done about it?—S.G., Hillsdale, NJ

From the editor, Mary Johnson:
Despite three successive tax cuts in 2001, 2002, and 2003, seniors have yet to get relief from the punitive taxation of Social Security benefits. As a Social Security recipient, if your income is over the limit, what you call the “Clinton Tax” subjects up to 85% of Social Security benefits to tax.
The taxation of Social Security benefits over the years, however, has truly been a “bipartisan” effort. President Reagan signed the first law, subjecting up to 50% of Social Security benefits to tax, in 1983. Here’s how the tax on Social Security benefits works:

Seniors are not allowed to report their incomes like regular taxpayers. The IRS requires that Social Security recipients first use a special formula to determine his or her “provisional” income. This is done by taking one's Adjusted Gross Income, then adding one-half of all Social Security benefits and all tax-free income (like proceeds from a ROTH retirement account or tax-free municipal bonds that are not normally counted).
For individuals with a provisional income less than $25,000 or couples with provisional incomes of less than $32,000, NO benefits are taxable.
For individuals with incomes of $25,000 to $34,000 or couples with incomes of $32,000 to $44,000, up to 50% of benefits are taxable. (The “Reagan Tax” revenues are earmarked for the Social Security Trust Fund.)
For individuals with incomes of more than $34,000 or couples with incomes of more than $44,000, up to 85% are taxable. (The “Clinton Tax” revenues are earmarked for Medicare Trust Fund.)

Social Security recipients understandably feel this is double taxation. In addition, income levels are not adjusted annually like income tax brackets. This means that every year more seniors are hit by the tax, making it a real back-door tax hike.

The Social Security Trustees estimate that the Social Security Trust Fund will receive $12.5 billion from the 50% tax in 2003. This figure is expected to jump to more than $26 billion by 2012. Over the next 10 years, the Social Security Trust Fund is expected to haul in $177.10 billion from the taxation of benefits. The Medicare Trust Fund (receiving the revenues from the 85% tax) is expected to take in $6,323 million in 2003 and more than $118,332 million over the next 10 years.

If the income levels that trigger the tax on benefits were adjusted for inflation they would affect far fewer seniors as illustrated below:

Tax	Filing Status	Provisional Income	Adjusted for Inflation*
50%	single	$25,000	$45,369
50%	couple	$32,000	$58,072
85%	single	$34,000	$58,834
85%	couple	$44,000	$76,828

*adjusted using COLA data from 1983 to 2002

In the 107th Congress, TSCL supported a bill offered by Senator Tim Hutchison (R-AR) that repeals the 85% taxation tier of Social Security and Railroad Retirement benefits. TSCL continues to review proposed legislation that eases or eliminates taxation both at the 50% level, and the 85% level. TSCL feels that such proposals should contain provisions to offset any funding lost to the Social Security and Medicare Trust Funds.

September 2003