Q: Obama made a campaign promise to eliminate all income taxation of seniors making less than $50,000 a year. So far that has not happened. Seniors haven’t gotten Social Security increases, and now more are forced to hunt for jobs. Is there any move to change the tax on Social Security benefits?
A: When Congress adjourned for the 2010 November elections, major tax legislation was left uncompleted. A bill introduced by Representative Trent Franks (AZ-2) would bar the inclusion of Social Security in gross income for tax purposes. A number of other bills would repeal or modify the 1993 law that subjects up to 85% of Social Security benefits to tax. But as of October 31, 2010, there was no legislative initiative to eliminate income taxation of seniors making less than $50,000 a year.
In addition, there was no move to adjust the income thresholds that subject Social Security benefits to taxation. Because the income thresholds are fixed, the number of seniors who discover their Social Security is subject to taxation grows each year. According to the Social Security Administration, 34 percent of beneficiaries pay federal income taxes on their Social Security income.
In 1983, the last time the Social Security Trust Fund was in financial crisis, Congress established the tax that subjects up to 50% of Social Security benefits to taxation on people with incomes of $25,000 (for single households) or $32,000 (for household filing jointly). The revenues collected from this tax go to the Social Security Trust Fund and help pay benefits of current retirees. In 1993 a second income tier of $34,000 (single) and $44,000 (joint) was added, which subjects up to 85% of Social Security benefits to taxation. The revenues for that tax go to help cover Medicare benefits.
Each time the tax increases were enacted, Congress sold them to voters saying only high-income seniors would be affected. But today $25,000—$44,000 is considered middle income. If the income thresholds established in 1983 would be adjusted for inflation, the $25,000 level would be $52,550 in today’s dollars and $44,000 would be $92,505.
With Social Security running deficits, the taxes flowing into the system are needed to pay benefits. But TSCL believes that in fairness to senior taxpayers the income thresholds that subject Social Security benefits to taxation should be at the very least adjusted to current levels of inflation and then adjusted annually like income brackets.
Sources: “Paying Taxes on Social Security Benefits,” Paula Span, The New York Times, September 13, 2010.