Kelly Bullis
For many years, I’ve been feeling like the lone voice in the wilderness shouting about the evil of taxing Social Security. Democrats and Republicans are equally guilty of causing this travesty.
It all started back in the 1980s when Congress and President Regan worked out a plan to save Social Security from going bankrupt. At that time, only about 10% of Social Security recipients (the “rich”) were set to pay tax on their Social Security benefits.
The problem is that over the years, the computation thresholds were never adjusted from inflation. Today, almost 90% of Social Security recipients pay tax on their benefits. Of course, President Clinton added to the misery in the late 1990s.
Recently, President Trump has become the loud voice calling for this to be fixed. The simple solution is just to index the original computation thresholds to inflation from the 1980s to now. Here is a simplified attempt to show how the computation works.
There are two tiers for taxing Social Security benefits. Tier 1: If your provisional income (PI) is between $32,000 and $44,000 ($25,000 and $34,000 for singles). PI is your Adjusted Gross Income (AGI) plus half of your Social Security benefits.
Tier 2: If your PI is above $44,000 ($34,000 for singles), you must include 85% of your Social Security benefits that exceed that threshold as taxable income, plus the lesser of the amount determined under the first tier or $6,000 ($4,500 for singles). In no way can the taxable portion of Social Security benefits exceed 87%.
Example: Your AGI is $40,000, and your Social Security benefits were $16,000. Thus, your PI is $40,000 plus $8,000 (half of your total Social Security benefits). Your PI is $48,000. Because your PI is higher than $44,000, you’re taxed on $9,400 of your Social Security benefits. ($6,000 from tier 1 plus $3,400 from tier 2.) For a married couple on very low income, that triggers a potential additional $1,000 in Federal Income tax!
Remember, these are the folks who are being forced to go back into the workforce, usually earning minimum wage, just to make ends meet! In my book, this is just plain EVIL! To make it even worse, at 85% of benefits being taxed, up to the maximum of 87% of benefits being taxed, for every dollar of extra earnings, they are being taxed on almost $2. Ugh!
Now the tax planner in me kicks in when I’m asked, “can this impact be reduced?” The trick is to knock down your PI below one or both thresholds. If you have enough capital gain income, you could harvest stock losses before the end of a tax year.
If you can afford it, you could invest in low dividend paying stocks. (Called growth stocks… don’t pay tax on such an investment until you sell the stock.) You could defer income to the next year if possible.
For example, if you plan on investing in CDs or T-bills, make sure they won’t pay interest until the next year. I encourage you to write your congressional representatives (house and senate) to encourage them to work with President Trump to get this fixed.
Have you heard? Isaiah 46:4 says, “Even to old age I am he, and even to gray hairs I will carry you. I have made, and I will bear. Yes, I will carry and will deliver.”
Kelly Bullis is a Certified Public Accountant in Carson City. Contact him at 775-882-4459, on the web at BullisAndCo.com, and also on Facebook.