A: Despite multiple tax cuts in recent years, Social Security recipients got no relief from the taxation of Social Security benefits. To the contrary, every year the benefits of more retirees are subjected to the tax, because the federal government does not adjust the income levels annually as is routinely done with income tax brackets.

In addition to not adjusting the income levels, the federal government also doesn’t allow Social Security recipients to figure their incomes like regular taxpayers. The IRS requires that retirees first use a special formula to determine “provisional” income — one that includes supposedly “tax free” money, such as tax-free municipal bonds or proceeds from ROTH retirement accounts, that’s not counted for other tax purposes.

The tax does not affect individuals with incomes less than $25,000, or couples filing jointly with incomes of less than $32,000. But up to 50% of Social Security 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 85% of the Social Security benefits are taxable of individuals with incomes of more than $34,000 and couples with incomes of more than $44,000.

When the 50% tax on Social Security was first signed into law by President Reagan, and the 85% tax later signed into law by President Clinton, it was sold to the public on the basis that it only affected “high income” seniors. Today, these income levels are no longer “high income.” In fact, they are lower than the national median income, which was $46,326 in 2005.

If income levels had been adjusted annually, from the time this tax was established, far fewer seniors today would be affected as illustrated in the following chart:

Those affected justifiably feel this is a form of double taxation. But it will get even worse in 2007. Consider this. Currently the 85% level of taxation is earmarked for Medicare. Nevertheless, starting in 2007, in addition to tax on their Social Security benefits, seniors with incomes exceeding $80,000 will also be required to pay much higher Medicare Part B premiums under “Means Testing.” These same individuals also quite likely paid more Medicare taxes than other workers over their careers. (Unlike Social Security, which has a maximum wage upon which workers pay Social Security taxes, Medicare taxes are collected on 100% of an individual’s salary.)

TSCL is opposed to Means Testing of Medicare, because it may only be a matter of time before Congress tries to expand it. In his fiscal year 2007 budget proposal, for example, President Bush proposed dropping the annual adjustment of income levels for Means Testing. If Congress were to adopt such an approach, more seniors would be affected every year (just like the taxation of Social Security benefits). TSCL supports the repeal of both the Means Testing of Medicare Part B premiums and legislation that would repeal the taxation of Social Security benefits.

Sign our Petition Opposing Medicare Means Testing now!

Sources: 2006 Social Security Trustees Report, May 1, 2006. 2006 Medicare Trustees Report, May 1, 2006. “Median Household Income Rises 1.1%,” Robert Guy Matthews, The Wall Street Journal, August 30, 2006.

November 2006