The other progressive income tax and how it robs seniors

Democrats have long sought to make the federal income tax even more progressive than it already is — and it is very progressive now. But there is an additional progressive income tax – a tax that most people don’t really know or think about – and it primarily punishes seniors, imposing a sort of tax double-whammy on them. 

Seniors who are 66 years old – the current retirement age for Social Security benefits – or older can begin receiving their Social Security benefits and still earn incomes without incurring an earnings penalty. (That penalty applies only to those who begin taking their Social Security benefits early, between the ages of 62 and 66.)

But if seniors who have reached the full retirement age continue working, or if they have other sources of income (e.g., interest or dividends, pensions, royalties or profit from investments or IRAs), they may have to pay income taxes on part of their Social Security benefits. 

So, the government forces workers (and employers, since the payroll tax is split equally between them) to pay the Social Security payroll tax and then may tax the benefits when the government starts returning the money after retirement.

In other words, seniors may face two progressive income taxes. The more income they have, the higher their regular income tax rate will be. And that higher tax rate will be applied to a growing portion, up to 85 percent, of their Social Security benefits.

The practical effect of this tax on Social Security benefits is to rob seniors of some of the benefits they have worked for and are entitled to. And it’s not like the income thresholds are high.

According to the Social Security Administration (SSA), if a retirement-age senior filing an individual tax return has a total annual income (excluding their Social Security benefits) between $25,000 and $34,000, that senior will have to pay federal income taxes on up to 50 percent of their Social Security income.

If a senior’s annual income is more than $34,000, he or she will have to pay federal income taxes on up to 85 percent of their Social Security income.

For a couple filling jointly, they will have to pay federal income tax of up to 50 percent on income between $32,000 and $44,000, and up to 85 percent on income above $44,000. 

And the more income they have by remaining a productive member of the labor force, the higher the percentage of their Social Security benefit the government will tax.

Oh, and if they continue working, they and their employer are continuing to pay the Social Security payroll tax, even though those seniors are receiving Social Security benefits that are being taxed. 

And it’s not just income from work. Seniors withdrawing funds from a traditional IRA or other tax-preferred account must pay standard income tax rates on those funds — taxes the individual avoided, or delayed, when the money was initially deposited in the IRA or other retirement account. 

Those newly withdrawn funds count as income that makes a senior subject to the Social Security benefits tax. Here’s how the Social Security Administration puts it:

“Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return).” 

So, a senior who is retired and isn’t working but is withdrawing, say, $50,000 a year from an IRA to live on will see part of his Social Security benefits taxed.

Some might argue that imposing income taxes on Social Security benefits encourages seniors to leave the workforce to make way for younger workers who need a job. But any such rationale – thinking that was part of the initial Social Security legislation that passed during the Great Depression, when jobs were scarce – no longer applies, and hasn’t for a long time. We need workers young and old, and now more than ever.

Of course, taxing Social Security benefits brings more money into a federal government that has for decades refused to live within the bounds of its tax revenue — or even close to it. So, it’s unlikely a spend-happy Congress will eliminate the benefits tax anytime soon, even if it does rob seniors of some of the benefits they deserve. 

Indeed, the bigger threat is Congress making it worse. Because if there is one thing the left likes more than a progressive income tax, it’s two progressive income taxes.

Merrill Matthews is a resident scholar with the Institute for Policy Innovation in Dallas, Texas. Follow him on Twitter @MerrillMatthews.