UNCLE SAM WILL TAKE 85% OF YOUR SOCIAL SECURITY CHECK AS A TAX

Dear INVESTMENT ADVISOR: Do you know what happens when one reaches the age of 70 and 1/2? I participated in 401(k) investments when I was employed, but no one prepared me for what would happen when I reached 70 1/2. I was led to believe that I would be in a different income tax bracket when I retired, so I would pay less in taxes. They never mentioned that Social Security benefits might be affected. We are paying taxes on 85 percent of our Social Security benefits. Knowing what I know now, I’m not so sure that I would have taken the same route. After the required minimum distribution is added, we are in another tax bracket. signed. R.

DEAR MR. R.

You’re not the only person who has been blindsided by the taxation of Social Security benefits. The tax was the brainchild of David Stockman, the director of the Office of Management and Budget during the Reagan administration. He slipped this little time bomb into Social Security reforms that were adopted in 1983.

SLIPPED IT? REAGAN'S HANDLERS MADE ME DO IT!
Slipped it, my @*$&)@ @*%) EYE!

It was a time bomb because the formula is one of the few parts of our entire tax code that are not indexed to inflation. As a result, very few people were affected in 1984, but many people are being affected in 2013. It will affect future retirees — your children and grandchildren — still more.

According to the 2013 Social Security Trustees report, for instance, the taxation of benefits brought only $2.8 billion back to Social Security in 1984. But last year the tax yield was nearly 10 times as much, $26.7 billion. The greater the rate of inflation, the greater the number of retirees affected.

Making up to 85 percent of your Social Security benefits taxable income increases your tax liability in two ways. First, it increases the amount of income subject to tax. Second, it increases the average tax rate that you pay on your income. You can imagine this is a kind of sandwich. The Social Security benefits meat slides in between two pieces of income bread. You pay taxes on the Social Security benefits. Then, because the second piece of bread is higher, that piece of bread may be taxed at a higher rate.

The only good news is that no more than 85 percent of your Social Security benefits can be added to your taxable income. Once that has happened, the burden is done — except that the unexpected additional income may have moved you into a higher tax bracket, one that you didn’t expect when you retired. But if you are paying taxes on 85 percent of your benefits now, you won’t be burdened with an additional Social Security benefits tax in the future as your required minimum distribution increases.

My wife and I are 67 years old. We have sufficient assets, own our home and have no debt. We have wills, powers of attorney and medical directives. I have always handled the bill paying and financial affairs. I have tried showing my wife how to do it, but she is not interested and has no aptitude for it. Reconciling a monthly bank statement baffles her. We have no children or close relatives.

We are in good health now, but what happens if I get dementia or die? My wife would need help writing checks, making income tax deposits and handling banking. Are there people who provide this kind of service for a fee?

I suggest that you start exploring your options by doing a Web search on “bill paying services for seniors.” If you select one now, you can have some confidence that it will operate properly when something happens to you.

That, however, won’t eliminate your wife’s vulnerability. There are countless vendors of financial products, and many salespeople prey on recent widows who have no financial experience.

To reduce that risk, I suggest that you simplify your investments as much as possible by reducing the number of holdings and consolidating. In an ideally simplified plan, you would have your financial assets reduced to a single broadly diversified balanced fund. Your wife can then arrange for a single annual distribution from that fund to her checking account every year.

You should also consider using some part of your financial assets to buy a single life annuity for your wife upon your death or disability.

You might also consider talking to your wife about how her reluctance to take on any of these adult responsibilities makes her a victim in waiting.

Scott Burns is a syndicated columnist and a principal of the Plano-based investment firm AssetBuilder Inc. Email questions to scott@scottburns.com.

~^~^~^~^~^~^~^~^~^~^~^~^~

How Did Social Security Become the Third Rail of American Politics?
(found online)

Social Security had become a difficult political issue long before the early 1980s when Tip O’Neill designated it the third rail of American politics. When Barry Goldwater lost the presidency to Lyndon Johnson in 1964, for example, many observers believed the loss was due in part to voter perception that Goldwater wanted to dismantle Social Security.

Established in 1935, Social Security quickly became what its creators initially envisioned: a “comprehensive package of protection” against the “hazards and vicissitudes of life.” Before long, millions of Americans were depending on Social SecuView dallasnews.com's mobile site

Taxation of Social Security benefits is a time bomb

In a free-market, individuals would be able to save tax free with a sound dollar. However, in 1913 the federal government programs of the Federal Reserve Bank and the income tax prevented this.

Both the income tax and The Fed are anti-savings. The income tax by taking a workers pay before they have a chance to save and The Fed with inflation that devalues the saving of the people. Together, the income tax and The Fed have converted us from a culture of savings and liberty to one of debt and dependancy.
Twenty years later after these programs were started, we were in depths of the Great Depression. People were retiring with out adequate savings. In 1935, the federal government responded to the problems they caused with Social Security.

As long as we have The Fed and income tax, we will be unable to reform Social Security. Once we end these programs, Social Security will no longer be necessary.

Reagan Effort to Reform Social Security Inspired “Third Rail” Metaphor

When Ronald Reagan ran for president in 1980, he campaigned on a pledge to preserve Social Security, even though he had supported Goldwater’s position 16 years earlier and had argued in favor of making Social Security voluntary. Early in his presidency, Reagan resisted Social Security proposals that he believed would require him to go back on his campaign promise.

But many government officials—including Budget Director David Stockman and Health and Human Services Secretary Richard Schweiker—continued to struggle with the runaway costs of Social Security coupled with rising budget deficits. Several Social Security programs were facing immediate funding shortfalls at the time, and officials needed to find some way to save $75 billion over five years.

Reagan Plan for Social Security Sparked Unexpected Controversy
Stockman argued for severe and immediate cuts, Schweiker proposed more modest adjustments. At a meeting with the president in May 1981, they and other presidential advisors outlined a plan that would save $80 billion by reducing aid to students who were children of retired workers, cutting disability payments by tightening eligibility requirements, and reducing early retirement benefits that would cut the monthly check for low-income retirees by a third.

Reagan’s advisors assured him that Congress would pass the measure with few objections. They were wrong.

Some members of Congress saw the call for immediate cuts in benefits as America reneging on its promises, and O’Neill fanned those sparks into flame in an effort to claim a Democratic win for the American people.

Speaking at a news conference, O/Neill said: "For the first time since 1935 people would suffer because they trusted in the Social Security system." When a reporter asked O/Neill if Reagan had made a political mistake in  trying to overhaul Social Security, O'Neill said: "I'm not talking about politics. I'm talking about decency. It is a rotten thing to do. It is a despicable thing."

Second Attempt at Social Security Reform Achieved Temporary Success
The measure was quickly voted down, but a few months later Reagan agreed to the formation of a bipartisan commission to examine Social Security and appointed economist Alan Greenspan as chairman. The commission proposed a mix of benefit reductions and tax increases that become law in 1983. Those changes included extending the retirement age to 67 and requiring people who were self-employed to pay the full Social Security tax instead of the 75 percent they had paid previously.

These changes provided some relief for the troubled system, but only temporarily. Two years later, rising budget deficits sent elected officials back to the table for another attempt to lower the cost of Social Security. In 1985, a proposal to freeze the annual cost-of-living adjustment for Social Security beneficiaries narrowly passed the GOP-controlled Senate and failed in the House. In the next election, the American voters ousted the Republicans and gave Democrats control of the Senate. Many political observers tied that shift in power to voter anger over the Republican attempt to reduce Social Security payments.

Voters Send Politicians a Strong Message
As a result of the 1986 elections, politicians got the message loud and clear that Social Security was sacred to the American people and tinkering with it—no matter how noble the intentions—was tantamount to political suicide.

That didn’t really change until George W. Bush ran for president in 2000, when the Republicans changed their strategy by embracing the idea of “privatizing” Social Security and trying to sell Americans on the vision of getting more money by combining lower guaranteed payments with self-directed investment accounts. This shift led many conservative pundits to declare that Social Security was no longer the third rail of American politics, yet over the next few years privatization failed to move forward and Social Security was still facing a bleak future.

Social Security continues to pose serious financial and political dilemmas for the American people—in part because it has become standard procedure for the federal government to “borrow” millions of dollars every year from the Social Security trust fund to help provide more money for discretionary spending. And those dilemmas are almost certain to continue for several more decades.

Social Security Remains the Third Rail of American Politics
As baby boomers start to retire in record numbers, politicians will be caught between an enormous population of voters who are relying on Social Security to help finance their retirement and another large group of voters that will not want to accept higher taxes to help pay for it.

As the political pressure builds for Social Security reform to preserve benefits without raising taxes significantly, the third rail of American politics is sure to start throwing off sparks once again.

THE REMEDY: If you're self employed, you only pay SS taxes on your net earnings.  You can construe  many expenses as "business" all that you can reasonably get away with, leaving only a mere pittance for them to tax. The double edge of that sword is you get only a pittance at the end too, but hopefully you bought things you can use in your old age to live off of.  For example a free and clear house with land to grow food on, tools, a root cellar, a goat barn, pig hutch, tilapia pond, etc.

This is right from a financial planning book:

The employer and employee usually contribute to the funding of old age, survivors, and disability income benefits under the social security system of the United States. The employee pays a payroll tax of 6.2% of compensation up to an annual contribution base limit ($110,000 for 2012) for each employee.

TRA 2010 enacted a "payroll tax holiday" for taxpayers lowering their social security tax rate to 4.2% for 2011, which is extended through 2012.

When an employee receives social security retirement or other benefits, up to 85% of the benefits may be included in the employee's gross income, depending on the emploee's modified adjusted gross income for the year. If the retires taxpayer's only income is from social security retirement benefits, the benefits will be completely excludable. If the taxpayer receives social security benefits and significant amounts of other income for the years as well, a portion of the social security benefits, up to a maximum of 85% of benefits received, must be included in gross income for the year.

So WORK HARD, budget harder. And if you're a young person reading this, save your own money by investing it in a money making cottage industry... and don't trust them to do it for you.  That is the moral of the story.  If it's not in your physical possession it's not really yours.

SEE TAX EXPERTS ON SIMILAR CONCERN
http://www.fool.com/retirement/general/2014/09/14/social-security-the-shocking-way-the-governments-t.aspx
 

<=== BACK TO THE TAX INDEX