There’s an email going around saying that President Obama’s finance team wants to tax direct deposited Social Security checks at 1% and that’s why everyone will be required to direct deposit their check starting in 2013. The bottom line with this is—it’s a bunch of horse hockey. (I like to keep my blog at a G rating.)
Let’s start with some background on the issue. It’s actually a recirculation of an old email from 2010 when the bill was originally introduced by a congressman named Chaka Fattah of Pennsylvania. He originally proposed this legislation with the name “Debt Free America Act” which was his plan to eliminate the national debt. (Back then the national debt was around $10 trillion as compared with today’s almost $16 trillion.) Here’s a link to his post about the bill which is dated April 15, 2010: http://fattah.house.gov/latest-news/fattah-my-bill-erases-the-national-debt-and-abolishes-april-15-as-personal-income-tax-day/
There are two really important things to know about this bill:
1. This is not an Obama Administration bill. It wasn’t a Bush bill either. Now, I’m making a guess but I think I’m pretty safe in saying that Romney would never support this bill either.
2. The bill already died a quiet death in committee. There was never even a floor vote. Nobody supported this bill except for Mr. Fattah.
So why am I writing a blog in 2012 about a phony email that started in 2010? Because the email is still going around! I just got it last week. And when somebody sends me an email about taxes I check it out.
So what else do I know about this bill? Well, Mr. Fattah re-proposed his bill in March of 2011 as HR1125. Once again, it went to committee the same day and nothing has happened since. There are no cosponsors to this bill. Not Tom Harkin, not Peter Defazio, not Nancy Pelosi; nobody.
If you still want more information, check out the Snopes.com article debunking it: http://www.snopes.com/politics/taxes/debtfree.asp
So folks, your Social Security checks are safe. If you get this in your email box, just delete it because it’s not true.
People often ask me if their Social Security income is taxable. No, sorry, I just lied. When I finish preparing a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ” People who say that are usually angry when they say it too. But, for many people, Social Security is taxable.
So how do you tell if your Social Security is going to be taxed? Here’s the quick and dirty way to figure it out. First, take half of all of the Social Security income you get and add that to all of the other income you get. If you’re single and the amount is over $25,000 you’ll start getting hit with tax. If you’re married filing jointly—then you’ll start getting hit at $32,000. If you’re married-filing separately and don’t live apart—then it’s all taxable.
So this can totally mess up your tax rates. For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border. You want to take a really nice vacation and it’s going to cost you $10,000. How much money do you need to take out of your IRA to go on vacation and pay the income tax?
Well, you know you need 15% more for the tax so let’s say you take out $12,000.
$12,000 X 15% = 1800
That means that you’ll have $10,200 for your vacation, right? (12,000 IRA – 1,800 income tax = 10,200 vacation money)
Looks good, except it’s wrong. See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile. So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes. ($18,000 X 15% = $2,700 and $2,700 – $1,800 = $900)
Now you don’t have enough money to pay for your vacation. You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.
Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.
$2,700 tax divided by $12,000 distribution = 22.5% tax rate
For lots of people, there really isn’t much you can do. If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out. But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it. You’ve got to know about the tax though if you’re going to plan ahead for it. If you want help figuring out if your Social Security is taxable, give us a call.
One of the quirky things I enjoy about doing taxes is that when I get someone’s Social Security number, I can tell where the person is from. The first three digits of your Social Security number are tied to a geographic area. The second two digits are a group number and the last four digits are a serial number. Social security numbers that were issued since 1972 can be tied directly to a state and is determined by the zip code on the address of the application. I can tell you 012 is Boston and the numbers go higher as you head west. (I can tell you a lot more, but it’s kind of embarrassing to admit that I know what the social security number codes mean.)
That’s all going to change now. On June 25, 2011, the Social Security Administration (SSA) adopted a new randomization program. It’s going to eliminate assigning the numbers based on geography. Part of this is due to the lack of new numbers available for use. Currently, there are approximately 420 million numbers available to be issued, but because the numbers are restricted by state, the numbers available were greatly limited. Randomizing the Social Security numbers opens up all of the available numbers for use, and keeps the SSN at nine digits instead of changing it to a larger number.
Another benefit to the randomization process is privacy. It will be more difficult for an identity thief to reconstruct someone’s Social Security number based on public information once the numbers are randomized.
Some numbers that still won’t be in use are 000, 666, or anything from 900-999. Only new social security numbers will be under the randomization process. You do not have to do anything about your Social Security Number if you already have one.
For more information about the Social Security randomization program, you can click this link: http://www.socialsecurity.gov/employer/randomization.html