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
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.