tax on social security

[bstaxes]

A client's father (new client to me) came to me stating he is over 70, why does he have to pay tax on social security? He received a letter from the IRS. He was told by whoever (barber, supplier, neighbor, or ???) that he does not. He has been self-employed all of his working years. I explained to him that he does not have to pay back his social security because of his age but the ss is taxable. He told me he paid tax twice (his share and the employer share which again is him) on the money when he earned it and his social security should not be taxed. I tried to explain to him that he earned enough money for his ss to be taxed and that is the rule. His self employment earns are high enough to cause the ss to be taxed. Anybody got a real simple explanation for him? I am at wits end. I would like him to be happy but I am not able to make him understand. Although he does have a real good point on double taxing.

[JohnH]

The simplest answers I can think of, and which I use in these situations are:

1) It's the law. I don't write 'em, I just interpret them.

2) I agree it's unfair, but I can't do anything about it.

Your time would be better spent complaining to your congressperson. Of course, they aren't going to do anything unless you can grease their palms with some big campaign contributions.

3) If my advice isn't adequate, maybe you need to have that barber prepare your tax return since he obviously has a better grasp of the tax system than I.

BTW, here's a 2003 Cato Institute article on the subject, altough I think it may raise more questions that it answers for some taxpayers. http://www.socialsecurity.org/daily/02-05-03.html

[Richcpaman]

John:

Your right, that article WOULD raise more questions than are really answered, especially from the point of view of a typical lay person, which this client appears to be.

But the clients premise is INCORRECT. He recieved no deduction for the amount that went into SS. (Except, for that 1/2 he paid as an SE person)

HE has NOT been taxed on the amount that went into SS. The Cato Institute article makes that clear.

And he is only taxed on a portion of the benefits he recieves, and if his other income was REDUCED, he would pay no tax at all on his SS earnings.

And, if he was to add up his contributions to SS since he started working, (45 years ago!) He may have recieved most of them within 3 years of starting to recieve SS. Affter that, then even in a so-called normal pension, he would be getting taxed on those amounts as well. With no income exclusion.

Can you *WIN* the argument? Educate the Client? No. IF AARP can't change it, then your client never will...

I always explain to a client that owes taxes and recieves SS, that "Hey, the government is paying it own taxes" How sweet is that?

Rich

[JohnH]

Rich:

You actually lay out some pretty good answers, although I agree that someone who just wants to gripe isn't going to be convinced anyhow. I like your last line, and it might work with some people. My only problem with using it is that my face may turn red with embarrassment at my inconsistency, since I constantly harp on the fact that the government doesn't HAVE any money of its own - it only has what it has confiscated form its rightful owners in the first place.

[jainen]

>>it only has what it has confiscated form its rightful owners in the first place<<

If that were true, we wouldn't have a nine trillion dollar debt. Actually, the U.S. government has many other sources of money.

By making favorable concessions to foreign governments (notably the Chinese) it can sell bonds which are technically loans but don't really have any forseeable way to be repaid except by "selling" more bonds. A different approach is to get the foreign governments to "float" their currency against the dollar. The Chinese haven't fallen for that scam yet, but the Europeans love it because it kind of backfired there. In 2002 our government could get a 10% bonus on the dollar by buying stuff in Europe; our current administration somehow turned that into a 44% penalty. But it worked fine in the previous administration.

Another good way is to print up a bunch of new hundred dollar bills. That used to be considered inflationary, but since they stopped publishing the money supply data last year nobody can hold it against them any more. I mean, it's not like the money has to be backed by gold or anything.

The best way of all is simply to have the Federal Reserve announce that there is now more money, and merrily proceed accordingly. They've been doing that a lot lately.

[bstaxes]

Thanks for all the help. John H you put a smile on my face with your answer. I guess the client is going to have to pay the tax and not be happy. The article on ss was interesting but I don't think I will show it to him. He definitely think he was double taxed and perhaps triple taxed. Oh well, someone once said, 'The only certainity in life is taxes and death'. I hope I am around to pay taxes for a long, long time.

[SCL]

John:

Your right, that article WOULD raise more questions than are really answered, especially from the point of view of a typical lay person, which this client appears to be.

But the clients premise is INCORRECT. He recieved no deduction for the amount that went into SS. (Except, for that 1/2 he paid as an SE person)

HE has NOT been taxed on the amount that went into SS. The Cato Institute article makes that clear.

And he is only taxed on a portion of the benefits he recieves, and if his other income was REDUCED, he would pay no tax at all on his SS earnings.

And, if he was to add up his contributions to SS since he started working, (45 years ago!) He may have recieved most of them within 3 years of starting to recieve SS. Affter that, then even in a so-called normal pension, he would be getting taxed on those amounts as well. With no income exclusion.

Can you *WIN* the argument? Educate the Client? No. IF AARP can't change it, then your client never will...

I always explain to a client that owes taxes and recieves SS, that "Hey, the government is paying it own taxes" How sweet is that?

Rich

He was taxed on his gross income that included his half of any soc sec amount that he paid. The fact that he didn't get to deduct it would make it nontaxable when received. Although to be fair, after he has recovered his cost contribution (like other pensions), then that amount could be taxed. But that would bring in everyone else who is not subject to the income limits. The taxation of soc sec benefits is a social engineering creation of congress (like most tax laws). The fact that it hasn't been indexed for these many years is what makes it unfair.

[jainen]

>>The fact that it hasn't been indexed for these many years is what makes it unfair. <<

By itself, Social Security is not taxable. Only in relation to other income does some (but never all) of it become taxable. Although the calculation of the amount subject to tax has not been indexed, the actual tax rate is the same as for ordinary income. That IS indexed annually, which seems fair and reasonable to me.

[taxxcpa]

>>The fact that it hasn't been indexed for these many years is what makes it unfair. <<

By itself, Social Security is not taxable. Only in relation to other income does some (but never all) of it become taxable. Although the calculation of the amount subject to tax has not been indexed, the actual tax rate is the same as for ordinary income. That IS indexed annually, which seems fair and reasonable to me.

It does NOT seem fair to me. A fair tax is a tax YOU pay. An unfair tax is a tax I pay and I'm paying tax on 85% of my social security since I failed to spend every nickel I made and saved and invested a few dollars so I wouldn't have to live on Social security.

[jainen]

>>An unfair tax is a tax I pay and I'm paying tax on 85% of my social security<<

Well, when you put it that way I can see that it IS unfair. It's unfair that you have more money than me, and the tax system unfairly emphasizes that fact.

[jainen]

>>The fact that it hasn't been indexed for these many years is what makes it unfair.<<

I'm always a little bemused at the question of fairness in our tax system. As you point out, social engineering is a big part of the law. We can conclude that taxation is not intended to be fair by, for example, treating everybody the same or compensating for inequities that otherwise exist. Rather, it is intended to provide certain opportunities for anyone who wishes to take advantage of them.

Concerning Social Security, many say it would be more fair to reduce payments to people who already have other means of support. Is that the kind of fairness you seek?

What does it mean that the Social Security base amount isn't indexed? It means if your Social Security and/or other income goes up, all of the increase is allocated to taxable benefits (semi-taxable, that is). Some people would rather have any increase allocated to non-taxable or proportioned, but I don't see how one theory is inherently more fair than the other since the same rules apply to everyone. Our economy is quite committed to progressive taxation; AMT (a form of flat tax) is fiercely unpopular.

[taxxcpa]

>>An unfair tax is a tax I pay and I'm paying tax on 85% of my social security<<

Well, when you put it that way I can see that it IS unfair. It's unfair that you have more money than me, and the tax system unfairly emphasizes that fact.

It is NOT unfair if I have more money than you do. What would be unfair would be if YOU had more money than I do.

Fairness, like beauty, is in the eye of the beholder (or the pocketbook of the beholder).

[jainen]

>>Fairness, like beauty, is in the eye of the beholder<<

I've always felt beauty is unfair. Well, I would.

Is a tax on beauty fair? A tax on fair beauties--only dumb blondes pay it. The beauty of that is AMT would be popular again (the Alternative Minimum Tint). Ahhh, that's not a good joke. Not even fair.

[joanmcq]

See, all they have to do is drop 'AMT' and market it as the 'fair tax'. I've seen a few proposals to disallow deductions for mortgage interest over a lower amount that currently allowed, and/or taxes paid (especially taxes paid). So, if its called AMT its bad, flat tax its good....

[JohnH]

I'd be all for taxing beauty.

Assuming that system had something comparable to the EIC, I'd be in line for huge refunds every year.