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PDtax
PDtax, CPA firm owner
Category: Social Security
Satisfied Customers: 4676
Experience:  35 years tax and professional advice in all matters money
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How and why can the IRS Justify double taxing Social Security

Customer Question

How and why can the IRS Justify double taxing Social Security Benefits?
We are initially taxed on Social Security while working, fine that should
be the end of it, but no, the IRS believes they are justified in doing a double
tax, when an individual applies for Social Security, is earning more than
$44,300. per year, at a take rate of 85% of ones total benefits per month.
This is corrupt, anyway one could look at this situation, please provide
a logical answer, without any fluff & bull story?
Mr. Paul
Alexandria, Va. 22304
Submitted: 2 years ago.
Category: Social Security
Expert:  PDtax replied 2 years ago.
Welcome to the site. I'm PDtax, and will be helping you today.
You're right, the amount you pay in is income taxed. The amount your employer pays in is a tax deduction for them, and not yet taxed to you.
If you earn $50,000 in wages, 7.65%, or $3,825, was withheld from your pay and taxed. The employer match of $3,825 has not been taxed.
Of the total paid in on your behalf, you have been taxed on only your contributions. The employer contribution, and the earnings, have not been taxed.
I agree that taxing all of your benefits is unfair. The special sliding scale for social security taxability allows low income social security recipients to escape tax completely, and others pay on a portion of their benefits. Even those who pay tax on all of their benefits pay tax on 85% of their benefits.
This is better treatment than traditional pensions you pay into, since you are taxed on everything above your investment in the pension. There is no escape for low income pension recipients.
Tax policy for social security taxation came about during the first Reagan administration in the early 1980's. Bringing the benefits in for taxation was a main goal of his first term as President, as the system was threatening to collapse. Withdrawals were forecast to exceed deposits and threaten the very viability of the system. Getting some tax revenues was argued to reduce waste and abuse in the system, balance the social security ledgers, and several other arguments that, in my opinion, made little sense.
Social Security has had to field your question many times, and posted a web page explaining the Reagan actions. http://www.ssa.gov/history/reaganstmts.html is the link, which I post for further edification.
When I look back on the 1980's and tax policy, I see some pretty shameful shifts of financial burdens onto the backs of American workers. Taxing Social Security, and the conversion of employer-based pensions to the system of IRAs and other programs citizens must pay for themselves, were huge changes at the time. Thirty years later, the tremendous explosion in personal wealth of the very wealthiest can give a great thanks to those Reagan tax policies.
This is my version, with no fluff and no bull. Thanks for asking at Just Answer. I'm PDtax.