Don't Mess With Taxes

Financial advice for older people also should include planning for taxes on Social Security benefits, unless a House bill to end that process passes.

If you're of a certain age (confession: I am), you're likely getting lots of notices about the possible hike in 2023 of Social Security benefits.

At one point, prognosticators were saying it could be as much nearly 11 percent. However, the recent easing of inflation lessens the likelihood of a double-digit percentage bump. The latest prediction is a 9.6 percent bump. Still not bad.

Most folks who get Social Security benefits will welcome any increase in their monthly government retirement supplement checks.

Other retirees, however, might be a little less enthusiastic the added funds. That's because they'll have to pay tax on the larger amount.

Ending taxing of Social Security benefits: Current tax law says that if you get income other than the monthly amount from Uncle Sam, then you could owe tax on up to 85 percent of your Social Security benefits. (More on this in a few paragraphs.)

One U.S. Representative wants to end this tax practice.

Rep. Angie Craig's "You Earned It, You Keep It Act," officially known as H.R.8717, would repeal federal taxes on retirees' Social Security benefits.

The Minnesota Democrat said she introduced the bill earlier this month because inflationary pressures have stretched the already limited budgets of many retired Americans.

"Social Security is a promise we have made to the American people – if you work hard and play by the rules, the dignity of a secure retirement will be within your reach. But taxing the very benefits American workers have earned after decades on the job diminishes our promise and threatens to undermine the financial security of retirees already struggling with rising prices," said Craig in an Aug. 16 statement on her bill's introduction.

To pay for the loss of the federal taxes Social Security benefits, Craig's bill would raise the earnings cap. This is the amount, adjusted annually for inflation, after which wages are not subject to Federal Insurance Contributions Act (FICA) withholding tax for Social Security.

For 2022, that amount is $147,000. The 2023 amount should be announced by the Social Security Administration (SSA) in October, along with any cost-of-living increase in benefits for retirees. Earnings exceeding the annual wage cap are not subject to FICA Social Security payroll taxes.

Craig's bill calls for raising the cap for individuals earning more than $250,000 annually and, in her words, "asking them to continue paying into Social Security each year."

When Social Security is taxable: The Social Security taxes Craig wants to end currently kick in if you make more than a certain amount of money while receiving the benefits.

When your total income as a single individual is less than $25,000 or doesn't come to more than $32,000 for a married couple filing jointly, then your Social Security benefits are not taxed.

But you'll be taxed on up to 50 percent of your benefits if, as a single filer, your combined income is $25,000 to $34,000. The tax triggering incomes for a jointly filing married couple are $32,000 to $44,000 for a married couple filing jointly.

As much as 85 percent of your Social Security benefits could be taxed if your combined individual income is more than $34,000 or you and your spouse get more than $44,000.

Combined income that triggers the tax: If you've saved for retirement, you'll likely exceed at least the 50 percent taxation threshold.

The dollar amount the SSA and IRS use is your combined income. That's defined as —

Roth IRA withdrawals do not count as combined income, but municipal bond interest does. The Form SSA-1099, Social Security Benefit Statement, that you get in January will show the amount of benefits you received in the previous year.

IRS.gov also has an online Interactive Tax Assistant you can use to get an idea of how much of your Social Security benefits are taxable.

Social Security tax history: The taxation of Social Security benefits began during President Ronald Reagan's first term with the adoption of the 1983 amendments to the Social Security Act.

With that law change, up to 50 percent of the benefits were made taxable after threshold amounts of $25,000 for individuals and $32,000 for married couples. The amounts were intentionally not indexed for inflation.

Ten years later, additional Social Security taxation changes were included in the 1993 Omnibus Budget Reconciliation Act. A second set of thresholds and a higher 85 percent taxable portion of benefits were added.

These 1993 bill changes are what Social Security beneficiaries now face if they get retirement money beyond Social Security. Again, these triggering earnings amounts are not indexed for inflation.

Limited prospect for passage: Craig's bill is awaiting action in the House Ways and Means Committee. With the days left in the 117th Congress dwindling, and the midterm election approaching, the bill is likely to die in the tax committee.

Craig's bill also faces competition from the Social Security 2100 Act: A Sacred Trust. This measure was introduced in October 2021 by Rep. John Larson in the House as H.R. 5723, and as S. 3071 in Senate by Sen. Richard Blumenthal. Both lawmakers are Democrats representing Connecticut.

The 2021 Act does not address the taxes recipients pay on a part of their Social Security benefits. However, like Craig's measure, the Larson/Blumenthal bill calls for increasing the earnings amount on which FICA Social Security taxes are collected. The pair would apply the payroll tax to wages of more than $400,000.

The provision would only affect the top 0.4 percent of wage earners, say the bill's sponsors, but it also would ensure that the wealthy pay the same Social Security rate as someone earning $50,000 a year.

The future of both the Social Security 2100 Act and You Earned It, You Keep It bills depends on, in large part, the result of the Nov. 8 balloting.

You also might find these items of interest:

• More potentially taxable Social Security benefits in 2022
• Some of VP Joe Biden's Social Security is taxed. Is yours?
• House bill would increase earnings limit for some working Social Security beneficiaries
• Bill to save Social Security would increase payroll tax wage base, change annual COLA calculation

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