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Scott Burns: Little middle-class tax continues to grow in size

Both parties talk about “helping” the middle class. But will they actually do it? Don’t count on it.

One reason to doubt the pious declarations of both parties is the fastest-rising source of tax revenue our government has — the tax on middle-income retirees.

I’m talking about the taxation of Social Security benefits. Middle-income earners who save enough to replace most of their pre-retirement earnings can now pay nearly double the income taxes they paid before benefits were taxed.

This is not small change. According to the 2012 Annual Report by the Trustees of Social Security, $22.2 billion of the benefits paid out were taken back in income tax payments in 2011. More important, the amount had doubled from only $11.9 billion in 2002 — and that, in turn, was double the $5.9 billion collected in 1992. The same trustees report projects that tax collections will increase even faster over the next 10 years, nearly tripling to $61.7 billion by 2021.

If you are still working and think this doesn’t affect you, don’t go away. The unique construction of this tax — based on one of the only formulas in the entire tax code that isn’t inflation-indexed — means that more and more retirees, at lower and lower levels of real income, will be sending some of their Social Security benefits back to the Treasury in the future. This is a tax that quietly keeps on growing. The younger you are today, the more it will affect you tomorrow.

To show the impact of this tax on middle-income retirees, I visited Randy Van Camp, the Dripping Springs CPA who does my tax return. I asked if he would calculate typical tax bills for middle-income retirees, with or without taxation of Social Security benefits.

The first thing you need to know is that this isn’t an eyeball-guessing exercise. It’s difficult to know how much you’ll pay. The formula exempts at least 15 percent of your Social Security benefits from taxation, but the formula makes different amounts of benefits taxable at different levels of other income. As a consequence, there is no simple rule of thumb for estimating how much the tax will cost you. It must be calculated with software.

But you can get an idea by examining the accompanying chart above. It shows joint and single returns at different levels of additional income. When he did the calculations, Van Camp found, as you would expect, that the tax bill rises with other income. And the closer you get to replacing your pre-retirement wage income, the greater the burden. It peaks when 85 percent of your Social Security benefits have been added to your taxable income. Once you are over that hump, you’re done. Basically this is a tax surcharge on middle-income retirement. It can double your tax burden.

Here’s an example: Tim and Tina Taxable enjoyed an earned income of nearly $70,000 before Tim retired last year. Tina worked, but at lower wages and for fewer years, so she claims benefits under Tim’s work record. Together they receive a total of about $35,000 in Social Security benefits. Their combined benefits replace about 50 percent of their earlier earned income. Their income tax bill rises sharply as their income from other sources rises.

With no income from other sources, they would pay nothing in income taxes. Ditto $15,000. But at $25,000 of other income, they would pay $1,128, of which $523 is due to the taxation of Social Security benefits. Even though they have replaced only 86 percent of their pre-retirement income, their tax bill has nearly doubled.

With $35,000 of other income, their tax bill is $3,534, of which $1,931 is due to the taxation of Social Security benefits. This nasty and obscure wrinkle in tax law, in other words, has more than doubled the tax bill of a middle-income couple if they save enough to replace their pre-retirement income.

Is this a giant, crippling tax? No. Retirees can expect no sympathy from those still working because their tax burden is still lower at any earnings level. For retirees with savings, the loss of interest income due to the zero-interest-rate policy of the Federal Reserve is far more punitive.

It’s just hard to understand, another “gotcha” from Washington. Congress slipped it into the tax code decades ago in an orgy of bipartisan agreement.


SCOTT BURNS is a principal of the Plano-based investment firm AssetBuilder Inc. His website is

— Universal Press Syndicate



Want to know more? Below are links to three earlier columns, including one that names the senators still in office who first voted this tax into place.

■ Scott Burns, “Making Things Right,” 2/18/2011:

■ Scott Burns, “Front Door and Back Door Tax Increases,” 2/11/2011:

■ Scott Burns, “Who Stole the Money in the Social Security Trust Fund,” 8/26/2011: