Social Security Benefits and Taxes (Part 2)

In last week’s post I talked about Social Security.  I specifically focused on how, for many Americans, Social Security benefits are the sole source of income but most of these benefits are subject at least in part to income tax.  That is the case for a single person who has more than $24,000 of income and for a married couple more than $34,000.

In fact, when you think about it, Social Security benefits are actually subject to taxation twice.  Contributions are taxed before they are deducted from your wages and then the benefits you receive in retirement are subject to tax a second time.

Two Congressman introduced a bill last year to eliminate that double taxation, however, it has been met with resistance.  With many predicting that the Social Security system will be insolvent in 10 years, those opposed to the bill believe that making benefits tax free would only worsen the problem.  But would it?  Currently the tax on benefits contributes only 4% of the funds needed to cover payments to retirees.  90% comes from the deductions from payroll for those currently employed.

Another bill recently introduced in Congress attempts to eliminate the resistance to tax free Social Security benefits by raising the Social Security wage base.  Currently payroll deductions for Social Security are applied to earnings up to $150,000.  The bill proposes to raise that limit to $250,000.  In essence, higher wage earners would help pay for a tax free benefit to help those in lower income brackets.

Whether these bills can get passed depends in large part on what happens in the upcoming elections in November, although it would appear that both parties should want to get behind something that can help retired Americans struggling to pay their bills.