Taxation of your benefits keeps increasing

Social Security started in 1935 and the benefits were expressly excluded from federal income taxation under a series Treasury Department Tax Rulings. This all changed with the 1983 and 1993 amendments to the Social Security Act. Beginning in 1983 if your basis income exceeded $25,000 for an individual or $32,000 for a married couple filing jointly up to 50% of your SS benefit was subject to your marginal tax rate. Median family income in 1983 was only about $19,000, so congress told us that these changes were only designed to tax the rich.

Today's tax brackets while working

Based on a $30,000 Social Security benefit and an additional $33,000 withdraw from your 401K, the green tick mark shows that today you would be right up against the 46.25% marginal tax bracket.

25% inflation based on the 1935 law

If we increase Social Security, your additional withdraw, the tax bracket, deductions, exemptions and the taxability point for your benefits all by 25%, the graph looks identical except for the income values at the bottom axis of the graph.

And based on the 1983 and 1993 amendments

Unfortunately, congress was not completely honest with us in 1983 and 1993 when they said those amendments were only designed to tax the rich, they left off the last word, “today”. Yes, based on the income level 33 and 23 years ago, only the rich would be taxed, but they specifically defined the taxability points so they would not be adjusted for inflation. This graph shows us what actually happens when those taxation points do not move 25% higher. Our inflation adjusted income is now being taxed at the 46.25% level, our overall “Tax Rate” increases, which causes our “After Tax” income to fall short of inflation and since inflation will continue and the taxation point will never move, the taxation of our benefits will continue to take larger and larger chunks of our benefits back.

What can we do?

Plan A: We could increase our ordinary taxable income by an additional $2,774 at the 46.25% tax rate to maintain the necessary 25% increase in “After Tax” income.

Plan B: We could reduce our ordinary taxable income by $4,250 to keep our “Taxable” income at or below the 46.25% marginal bracket and set up “non-Taxable” income sources such as a Roth IRA.

How much will I get from Social Security?

A-         A+

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