From: Richard Arsinow <richard.arsinow@rauland.com>
Subject: RE: Taxing Benefits
You suggest making all SS benefits subject to income tax.
One thing is certain: The present tax situation is intolerable. It creates a 51.8% marginal tax bracket for some of our seniors. That's right---51.8%! For seniors who are in the transition area from 50% to 85% taxation, every additional dollar of "other income" results in 51.8 cents of additional federal income tax. This is not widely known because it is not explicitly stated on the tax forms or in the tax publications. It is necessary to work through a worksheet which is not presented in a straightforward manner, multiplying figures and comparing, subtracting and adding, to arrive at the taxable amount of SS benefits. The gist of the worksheet is that, as "provisional income" (most categories of taxable income, plus nontaxable interest income, plus 50% of SS benefits) rises past the first threshold, the marginal rate jumps from 28% to 42%, stays at 42% until fully 50% of SS benefits are taxable, or until the second threshold is reached, whichever comes first. If the 50% of SS benefits was reached before the second threshold, the rate drops back to 28%, where it stays until the second threshold is reached, whereupon it jumps to 51.8%, where it remains until fully 85% of SS benefits become taxable, whence it drops back to 28% again. Did congress intend to create these 42% and 51.8% tax brackets for middle-class seniors? Perhaps not, but they are a direct result of the way they wrote the law.
These are not wealthy seniors, those who have to pay these horrific marginal rates. For the most part they are trying to follow the retirement scenario which was advocated when SS was first proposed, that of the three-legged stool of pension, savings and SS. The first threshold is $25,000 for single, head of household or recent widow(er) returns or $32,000 for married joint returns. The second threshold is $34,000 for single, head of household or recent widow(er) returns or $44,000 for married joint returns. Married couples who live together but, for other tax reasons, need to file separately are severely penalized. Their thresholds are $0.
The thresholds are not indexed to inflation, so more and more seniors who have modest increases in income, in line with inflation, begin to feel their effect.
There are two current bills which call for the repeal of the SS benefit taxation: H.R.761 and S.488. If you support this repeal, let your Representative and Senators know, and cite the bill number.
Taxing SS benefits for all recipients would not be as desirable as the complete repeal, but it would eliminate the hidden "means testing" aspect of current law.
Some suggest taxing 85% of all SS benefits. The question I have for you and for those who support the current law is:
What is the justification for taxing any more than 50% of SS benefits?
Benefits are financed equally by employer contributions, on which an income tax deduction has been taken, and employee contributions, which are required to be included in reported taxable income and for which no deduction is allowed. Where is the justification for the double taxation of the second half of benefits?
