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The New GOP Tax Law Means This 35-Year-Old Social Security Rule Likely Won't Be Changed

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This 35-year-old Social Security rule is hitting middle-income seniors right in the pocketbook

But the GOP’s agenda may wind up at odds with the public’s wishes. For example, Social Security beneficiaries, and groups representing the interests of seniors, such as The Senior Citizens League (TSCL), have long requested that Congress make adjustments to the rules concerning the taxation of Social Security benefits.

In April 1983, the Reagan administration passed the last sweeping reform of Social Security, which, among other things, allowed for the taxation of Social Security benefits if taxpayers crossed certain earned-income thresholds. Single taxpayers who earned $25,000 or more in income, and couples filing jointly with more than $32,000 in earned income, would have half of their Social Security benefits exposed to federal income tax. In 1993, under the Clinton administration, a second tier was added that allowed 85% of Social Security benefits to be exposed to federal taxation if single taxpayers made more than $34,000 (or over $44,000 for couples filing jointly).

When the taxation of benefits was implemented, it affected only around 1 out of 10 senior households. But, almost 35 years later, it now impacts around 56%, according to TSCL. The reason? The aforementioned income thresholds of $25,000 for single taxpayers and $32,000 for couples filing jointly have never been adjusted for inflation. Thus, with each passing year, more seniors finds themselves subject to an archaic tax rule.

An annoyed senior man wearing a suit.An annoyed senior man wearing a suit.

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An annoyed senior man wearing a suit.

Image source: Getty Images.

Changing this rule is probably out of the question

Some would argue that adjusting these figures for inflation would mean more money in the pockets of middle-income seniors who need it most. But there are two likely reasons why this nearly 35-year-old rule is more unlikely to be changed than it’s ever been.

First, Social Security already has issues of its own. The latest annual report from the Social Security Board of Trustees estimates that there’s a $12.5 trillion budget shortfall between 2034 and 2091. Unless beneficiaries want to face a cut in benefits of up to 23% by 2034, lawmakers have to look at real ways to increase revenue. Adjusting the taxation of benefit thresholds higher for inflation would result in a reduction of collected revenue at a time when it’s sorely needed.

Secondly, and by a similar token, the federal government needs every dollar in tax revenue it can collect following the passage of the new tax law. Even though the taxation of benefits generated “only” $32.8 billion for the program last year ($957.5 billion was collected, most of which came from Social Security’s payroll tax), adjusting the thresholds for inflation would presumably grow, not shrink, the federal deficit over the next decade.

I’m sorry to say, folks, but many of you are probably going to be stuck paying federal income tax on your Social Security benefits for many more years to come.

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