May

22

Social Security Tax Trap

Posted by cameron

May 22, 2007 |

So you get your new statement from Social Security and it projected an increase of approximately 3% this year and 4 % last year. You think you are doing well. Think again. You are slowly but surely sliding into the Social Security Tax Trap. The Social Security payment increases each year when the government takes a snapshot of the countries inflation rate. It uses that to determine the following years increase in Social Security payments. Unfortunately the government doesn’t apply it to the income tax limits before taxes apply. As you will see from the example below, this has the affect of moving you, year after year, into a more heavily taxed situation. In fact, given enough time, every single person in the States will end up paying taxes on most of their Social Security check. If you live long enough they will break you financially. If you haven’t read the post about taxes on social security you can look here.

Example

Social Security Income = $20k

Other Income = $20k

½ Social Security =$10k

½ Social Security + Income = $30k. (Call this X)

The first taxable boundary for a married couple is ½ Social Security + Income = $32k

In this example the couple start $2k below this taxable boundary, which is a good thing. Now look what happens over a few years with Social Security Income increasing with inflation but that $32k boundary remaining stationary.

Assume an even 3% Social Security increase per year:

First year X = $30K

Second Year X = $30300

Third year X = $30,609

Fourth Year X = $30,927

As you can see, in about another three or 4 years the income calculation will cross the $32k boundary creating a taxable situation. From that moment on it gets worse as each year you get those increases which will drive you further over that limit. You are sliding into the Social Security Tax Trap.


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