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Are Your Social Security Benefits Taxable?

The Tax Code Run Amok

I just finished filling out my tax forms for 2023. To say it's an ordeal is an understatement. It seems like the IRS Tax Code was written by lawyers who purposefully wrote it to confuse taxpayers, perhaps because it then becomes a full employment job opportunity. Having gone through the experience, I have become a devotee of a flat tax. It would make life easier for millions of taxpayers. It's also a fairer system than the one in place because it eliminates some of the techniques wealthy taxpayers use to reduce their taxable income.

Then there is the Schedule D Tax Worksheet, or the Qualified Dividends and Capital Gain Tax Worksheet, both of which seem obscure. I say we need to get rid of these worksheets because, like the one for social security discussed below, they are just too complicated for the average taxpayer to understand.

A flat tax should replace the current system of taxation. A Flat tax is a single tax rate applied to all taxpayers regardless of income. Employing a flat tax means that taxpayers cannot take deductions or exemptions. Most flat tax systems do not tax income from dividends, distributions, capital gains, or other investments. The opposite of a flat tax is a progressive tax, where taxation rises with a taxpayer's income.

A flat tax system is fairer, especially for low-income taxpayers who can't avail themselves of deductions the wealthy use to lower taxable income. Lower income taxpayers rarely own a house, so the real estate tax deduction is not available. More will be said about this next in the discussion of SALT. Lower income taxpayers do not have any discretionary income to donated funds to charitable organizations, and even if they do their standard deduction is greater than their itemized deductions so they can't use the charitable contributions deduction.

Well, the wealthy are treated unfairly as well. The SALT deduction (state and local tax) limits deductions in that category to $10,000. This means deductions for state income taxes paid, real estate taxes, property taxes and the like can only be deducted up to $10,000. If you live in California, as I do, you probably have $10,000 or more just in real estate taxes so you can't use the full amount or the other taxes mentioned.

Congressional Republicans instituted a $10,000 cap on the amount of state and local taxes can be deducted from taxpayers income for the purposes of calculating federal tax liabilities as part of the 2017 tax reform package that was the policy centerpiece of former President Donald Trump’s administration. The measure was a critical piece of the tax deal that raised hundreds of billions of dollars in taxes, enabling Republicans to lower the corporate tax rate from 35% to 21%.

A tax bill was voted on in the House of Representatives on February 14, 2024, and it failed by a vote of 225 to 195. The bill would have doubled the deduction to $20,000 for married couples who file jointly and only for those making less than $500,000.

One could say that for many high-income people, the cap raises the net cost of living in New York than Texas and Florida, states without income taxes that rely more on sales taxes.

What really made me question the fairness of the tax system is the Social Security benefits worksheet. It is used to determine the amount of taxes a person must pay on their social security benefits. I was outraged by this provision. I was affected because my benefits exceeded the limit beyond which they become taxable.

Social security benefits worksheet
Social Security income is generally taxable at the federal level, though whether or not you have to pay taxes on your Social Security benefits depends on your income level. If you have other sources of retirement income, such as a 401(k) or a part-time job, then you should expect to pay some income taxes on your Social Security benefits. If you rely exclusively on your Social Security checks, though, you probably won’t pay taxes on your benefits. Many taxpayers fall into this class because their employer provides retirement income as well.

Here is the IRS description of whether you will be taxable assuming you receive social security benefits. "For married couples filing a joint return, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security payments." The combined income amounts are ridiculously low. In fact, many taxpayers wind up in the 85% category. I believe, this tax should die a natural death. Why? I also had taxes deducted from each social security check. This is a clear example of double taxation.

Just look at the tax benefits worksheet to understand why the tax on social security benefits. You need a doctorate in taxation to follow it.

The definition of income—what it is and how it’s taxed—is a core issue of a Supreme Court case that could have far-reaching effects for taxpayers. Moore v. United States, argued before the court in December, concerns the taxation of unrealized income. A finding on whether the plaintiffs, Charles and Kathleen Moore, must pay taxes on their profits as partial owners of a multinational corporation, could lead future courts to strike down other parts of the U.S. tax code. A ruling is expected this spring or summer.

So, what is unrealized income? When you invest — whether in stocks, real estate or cryptocurrencies — the fair market value of your investment could change hundreds or thousands of times before you sell it. Until you sell, your investment gains or losses are just on paper because you haven’t locked them in by cashing them out. At this point, any change in value since you purchased the investment is known as an unrealized gain or unrealized loss.

I could go on, but you get the point. Good luck in filing your taxes!

Posted by Steven Mintz, Ph.D., aka Ethics Sage, on February 20, 2024. You can sign up for his newsletter and learn more about his activities at: