Drain The Trust Funds

     From the Washington Post:

A new report projects that the Social Security Trust Fund might run out of money within six years under a Donald Trump presidency, while Vice President Kamala Harris’s proposed policies would not meaningfully change the current trajectory.

Social Security faces a looming funding crisis in an aging country, with trustees most recently predicting that the retirement and disability program’s trust fund will become insolvent in 2035. Many of Trump’s campaign proposals would accelerate that timeline, potentially by years, said the Committee for a Responsible Federal Budget, a nonpartisan group that opposes large federal deficits.

In a report released Monday, the organization concluded that many of Trump’s proposed second-term agenda items all work in the same direction when it comes to the Social Security Trust Fund. The budget group did not produce a similar report on Harris’s policies because they would have a negligible effect measured only in weeks or months rather than years, said Marc Goldwein, CRFB’s senior policy director. ...

Most directly, Trump has promised that no Social Security recipients should have to pay federal income taxes on their benefits. Under current law, 40 percent of beneficiaries pay taxes on some portion of their Social Security. The tax they pay on their benefits goes directly back to the trust fund, and getting rid of it could cost the program almost $1 trillion over 10 years, the report forecast.

Other Trump policies might have indirect effects. Trump’s pledge to deport millions of undocumented workers could cost the trust fund hundreds of millions of dollars, the CRFB said. Many undocumented immigrants have payroll taxes taken out of their paychecks for the Social Security Trust Fund, but never become eligible to claim benefits, so they are a net positive for the program. ...

 

It's An Idea

    From The Case For Using Subsidies For Retirement Plans To Fix Social Security by Andrew Biggs and Alicia Munnell:

The U.S. Treasury estimates that the tax preference for employer-sponsored retirement plans and IRAs reduced federal income taxes by about $185-$189 billion in 2020, equal to about 0.9 percent of gross domestic product.1 However, the best evidence suggests that the federal tax preferences do little to increase retirement saving.  ...

The [report] concludes that it makes little sense to throw more and more taxpayer money at employer plans and IRAs. In fact, the case is strong for eliminating the current tax expenditures on retirement plans, and using the increase in tax revenues to address Social Security’s long-term financing shortfall. ...

    This doesn't appeal to me. It's very unlikely to pass. There aren't specific tax revenues involved, just a reduction in tax preferences. I'd be more in favor of dedicating revenues from the estate tax, excise taxes and tariffs to Social Security but I doubt that would be enough to matter much. It's becoming more and more obvious to me that the only solution to the long term funding shortfall is an infusion of general tax revenues. The things that people discuss, raising full retirement age and lifting the cap on wages covered by the FICA tax, even together, aren't nearly enough to solve the long term funding problem.

Thanks, Donald Trump!

      From GOBankingRates.com:

Employers and self-employed individuals who chose to defer paying part of their 2020 Social Security tax obligation [because then President Donald Trump, as part of his re-election campaign, gave them the option or because they were federal employees who had it forced upon them by Trump] must make a payment by Jan. 3, 2022. While many received reminder billing notices from the IRS, the agency also noted that those affected are still required to make a tax payment, even if they never received a bill.

 “As part of the COVID relief provided during 2020, employers and self-employed people could choose to put off paying the employer’s share of their eligible Social Security tax liability, normally 6.2% of wages,” according to the IRS reminder. “Half of that deferral is now due on January 3, 2022, and the other half on January 3, 2023.” ...

Social Security 2100 Act Moves Forward

     John Larson, the Chair of the House Social Security Subcommittee, has been pushing the Social Security 2100 Act. Now comes word that he's planning a hearing on the bill next month and a markup in September. This doesn't guarantee that the bill will proceed to markup before the full Ways and Means Committee much less that it will get a vote on the House floor but it's a sign that the bill is moving forward. Of course, the bill won't get a vote in the Senate in this Congress. This is about setting the stage for what happens after the 2020 election if Democrats control both Houses of Congress plus the White House. Of course, that's a big "if" but this bill would be hugely important if that "if" comes to pass.

      Here are the major provisions of the Social Security 2100 Act:

• Benefit bump for current and new beneficiaries – Provides an increase for all beneficiaries that is the equivalent of 2% of the average benefit. The United States faces a retirement crisis and a modest boost in Social Security benefits strengthens the one leg of the retirement system that that is universal and the most reliable. [Sec. 101]

• Protection against inflation – Improves the annual cost of living adjustment (COLA) formula to better reflect the costs incurred by seniors through adopting a CPI-E formula.  This provision will help seniors who spend a greater portion of their income on health care and other necessities.  Improved inflation protection will especially help older retirees and widows who are more likely to rely on Social Security benefits as they age.  [Sec. 102]

• Protect low income workers – No one who paid into the system over a lifetime should retire into poverty.  The new minimum benefit will be set at 25% above the poverty line and would be tied to wage levels to ensure that the minimum benefit does not fall behind.  [Sec. 103]

• Cut taxes for beneficiaries – Over 12 million Social Security recipients would see a tax cut[ii].  Presently, your Social Security benefits are taxed if you have non-Social Security income exceeding $25,000 for an individual or $32,000 for couples.  This would raise that threshold to $50,000 and $100,000 respectively. [Sec. 104]

• Holding SSI, Medicaid, and CHIP Beneficiaries Harmless – Ensures that any increase in benefits from the bill do not result in a reduction in SSI benefits or loss of eligibility for Medicaid or CHIP. [Sec. 105]
• Have millionaires and billionaires pay the same rate as everyone else – Presently, payroll taxes are not collected on wages over $132,900. This legislation would apply the payroll tax to wages above $400,000.  This provision would only affect the top 0.4% of wage earners. [Sec. 201, 202]

• 50 cents per week to keep the system solvent – Gradually phase in an increase in the contribution rate beginning in 2020 so that by 2043, workers and employers would pay 7.4% instead of 6.2% today. For the average worker this would mean paying an additional 50 cents per week every year to keep the system solvent. [Sec. 203]

• Social Security Trust Fund Established – Social Security provides all-in-one retirement, survivor, and disability benefits funded through the dedicated FICA contribution paid by workers. There are technically two trust funds, Old-Age and Survivors (OASI) and Disability Insurance (DI), and that are usually referred to as the Social Security Trust Fund. This provision combines the OASI & DI trust funds into one Social Security Trust Fund, to ensure that all benefits will be paid.  [Sec. 204]

Important Change For Disabled People With Federal Student Loans

     I missed that the big tax bill passed at the end of 2017 contained a change that benefits some disabled individuals. You were already able to get a federal student loan discharged if you are disabled and Social Security had set a five to seven year re-examination date for you. However, the discharge of the debt was considered income to the disabled person which often meant that the discharge could cause an expensive tax liability, which defeats the purpose of giving the discharge in the first place. That was changed at the end of 2017 by 26 U.S.C. §108(f)(5)(A), which provides that the discharge of a student loan debt for this reason is not income. However, this sunsets after 2026 but I doubt it will be allowed to end then.

     Unfortunately, the five to seven year re-examination date requirement limits the value of this. I don't know what the numbers are but I'm pretty sure that few who are found disabled by Social Security get a five to seven year re-examination date even though very few have a realistic hope of getting better. I don't know that there are any re-exam dates that long for any sort of mental illness other than profound brain injury.

SEI Problems

     The Earned Income Tax Credit (EITC) is a fine way to help low income workers. The problem with the EITC is that you must have some income to get the credit. This creates a temptation to create fictitious income in order to get the credit. 

     Social Security's Office of Inspector General (OIG) has issued a report on the effects of correcting its earnings records to remove improperly recorded Self Employment Income (SEI). The amount removed from earnings records is not insignificant -- around $200 million a year. Most of it is removed for reasons other than fraud -- routine mistakes in reporting income such as an incorrect Social Security number.
     While some SEI is removed due to EITC fraud, there's no doubt that there's plenty more fraud that's never identified. A significant part of the EITC fraud, perhaps most of it, isn't the fault of the person in whose Social Security number the SEI was recorded. The way this works is that a crook finds out that a person isn't working due to age or illness and wouldn't be filing a tax return. It may be a relative or friend. They obtain the Social Security number and file a tax return in that person's name listing fictitious SEI. The crook asks that the tax refund go to a bank account he or she controls. The elderly or sick person whose Social Security number was used never becomes aware of the fraud. The federal government never finds out about the EITC fraud in most cases but even if they do the amount of money is so small so they don't expend much effort tracking down the crook. There are also persistent reports that some unscrupulous tax preparers are involved in EITC fraud in various ways.
     Correcting earnings records because of misreported SEI, whether accidental or fraudulent, is not an insignificant burden for Social Security. It's also causing incorrect benefit payments because of inflated income on earnings records although the report doesn't try to estimate how much money this would be.

What Effects Will Tax Bill Have On Social Security Trust Funds?

     The FICA tax that supports the Social Security trust funds is not insignificant. It's 15.3% if you're self-employed. Many self-employed people have gotten around this by incorporating their businesses as what have been called "S corporations." This is now being referred to as a "pass-through corporation", a more descriptive term for people unfamiliar with the Internal Revenue Code, which, of course, is most people. Pass-through corporations pass along all their net income to their owner or owners. There's no corporate taxes paid. Payments from a pass-through corporation are not considered wages and are not subject to the FICA tax.

     The Republican tax bill that is likely to pass this week adds a huge incentive for switching to a pass-through corporation. Subject to some limits, 20% of income from a pass-through corporation isn't taxed. This huge tax advantage is on top of the exclusion from the FICA tax. Almost everybody with a business will now switch to a pass-through corporation. Many people who aren't now thought of as self-employed will try to find some way of receiving payment for their work through a pass-through corporation.

     What effect will this have on the Social Security trust funds? I haven't seen any estimate but it's bound to have a significant negative effect on the trust funds. Of course, in the long run, it's going to leave many people without the quarters of coverage they need to receive Social Security benefits but it will take longer for that effect to become obvious.

     By the way, I can't seem to find out whether professional practices such as law firms are excluded from pass-through corporation treatment. The last I heard was that this was an issue still to be resolved. I can't see a reason why a trucker or construction worker is eligible for this but not a lawyer or architect. Really, I don't see why anyone should be eligible for this. It's a massive, intentionally created loophole at the expense of ordinary working men and women.
     By the way, even if professional practices are excluded, that doesn't mean that lawyers and other professionals can't benefit. Let's say a law firm forms a corporation that's not a law firm but a "staffing agency." The lawyers wouldn't be employees of the staffing agency but the firm's non-attorney staff would be. The law firm makes a generous enough payment to the "staffing agency" corporation so that it makes a substantial profit which it then pays out to the lawyer owners. Since the staffing agency corporation isn't a professional practice, 20% of the distributions aren't taxed. I can figure this one out and I'm not a tax lawyer or accountant. We'll see what the experts can come up with.
     Update: I can now say that law firms are excluded. (page 39). However,  I have seen nothing that would prevent a staffing corporation from qualifying and that could achieve much the same result.

Devote Estate Tax Revenues To Social Security Trust Funds?

     From an opinion piece written for The Hill by Nancy Altman, co-director of Strengthen Social Security and a member of the Social Security Advisory Board:

Of the many giveaways to the super-rich in the Republican tax bill, the elimination of the estate tax stands out. This tax, the government’s most progressive source of revenue, does not affect 99.8 percent of Americans. Rather, it is paid by Republicans’ billionaire donors. ...

If Republicans don’t want the revenue from that top 0.2 percent of wealthiest Americans to run the government, let’s dedicate it to Social Security and use it to expand those modest but vital benefits for everyone. ...

[T]he bulk of income gains captured by the wealthy either fall above Social Security’s maximum earnings contribution cap (currently $127,200), or are unearned income on which they do not pay Social Security contributions.

Since the earnings of high-income workers have increased much more rapidly than the average in the last several decades, Social Security now covers only about 82 percent of all wages. In 2016 alone, those at the top paid $80 billion less to Social Security, only because the cap has slipped from covering 90 percent of wages, as Congress intended, to 82 percent today. Those are billions of dollars that should have gone to Social Security but instead stayed in the pockets of the wealthiest among us. Unquestionably, the richest are not paying their fair share into Social Security. ...

Isn’t it more than fair that their heirs, who had nothing to do with creating the wealth, receive most of it, but not every single penny of it? Isn’t it more than fair that a small piece of all that wealth go to the rest of us, without whom that wealth would never have been amassed? ...

Social Security Will Be Affected By Republican Tax Bill

     The tax bill that Republicans hope to pass would potentially have effects upon Social Security. It would trigger budget rules that would demand significant cuts in Social Security and Medicare. Congress would still have to pass those cuts but they would have held a gun to their heads to force themselves to do so. However, the bill would end a tax loophole that has allowed many professionals to avoid the FICA tax that supports Social Security by using pass-through corporations.

I.R.S. Drops Coal In The Stockings Of Poor Disabled People

     From the Washington Post:

The Treasury Department refuse[d] to stop forcing permanently disabled people to pay taxes on student loans that have been canceled, leaving a vulnerable population susceptible to thousands of dollars in charges, according to Senate staffers.

 Anyone with a severe disability is eligible to have the government discharge their federal student loans. The process is widely considered difficult to navigate, so the Obama administration allows people to use their Social Security designation to apply, yet few take advantage. As a result, the Education Department began identifying borrowers too disabled to repay their federal loans and guiding them through debt cancellation. The trouble is, every dollar forgiven by the government is considered taxable income.

Congressional lawmakers have urged Treasury to use its administrative authority to fix the problem, but the department is not taking action.

At a meeting Wednesday, Treasury officials informed Senate staffers that it will not issue guidance addressing the tax penalty for disabled borrowers, according to people in attendance who were not authorized to speak publicly. They said Treasury officials conceded that roughly two thirds of affected borrowers are insolvent, a designation that would allow Treasury to waive any taxes connected to discharged loans. Claiming insolvency, however, involves complex paperwork. ...

More Social Security Benefits To Be Subjected To Income Tax

     From a study by Social Security's Office of Retirement and Disability Policy:

Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income. Because those income thresholds have remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time. A Social Security Administration microsimulation model projects that an annual average of about 56 percent of beneficiary families will owe federal income tax on part of their benefit income from 2015 through 2050. The median percentage of benefit income owed as income tax by beneficiary families will rise from 1 percent to 5 percent over that period. If Congress does not adjust income tax brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.

Social Security Disability Benefits Can Cause Tax Problems

     This Article highlights the fact that the taxability of Social Security disability benefits paid in a lump sum causes problems for many taxpayers -- and the writer was apparently unaware of the lump sum election or of the fact that long term disability benefits are actually taxable for most people since they come as an employee benefit.

CRS Study On UI Offset

     The Congressional Research Service is out with a report on the concurrent receipt of Social Security disability benefits and unemployment insurance benefits. The report is superficial but it does contain an estimate from Social Security's Chief Actuary that only about 0.39% of Social Security disability recipients also receive unemployment benefits. In other words, it's a tiny problem. Doing something about it wouldn't save much money.
     The report doesn't deal with the considerable technical problems in implementing an offset. Many states now have an offset that goes in the opposite direction, reducing unemployment insurance for Social Security disability benefits. How do you avoid a double offset? Similarly, Supplemental Security Income (SSI) benefits are already reduced for the receipt of unemployment benefits. Many people receive both SSI and Disability Insurance Benefits (DIB). Add an offset to DIB and you're doubly offsetting the same benefits. And there's the tax issue. Yes, the tax issue. Unemployment benefits are fully taxable. Social Security disability benefits usually aren't. If you have an offset that goes one way in some states and another one in other states, you have to add a provision to the Internal Revenue Code to equalize treatment. You say that you can't imagine that kind of provision in the Internal Revenue Code? Well, we already have such a provision in the Internal Revenue Code to equalize treatment between states that have a regular workers compensation offset and those which have a reverse offset. Here's I.R.C. 86(d)(3), for your reading pleasure:

For purposes of this section, if, by reason of section 224 of the Social Security Act (or by reason of section 3(a)(1) of the Railroad Retirement Act of 1974), any social security benefit is reduced by reason of the receipt of a benefit under a workmen’s compensation act, the term “social security benefit” includes that portion of such benefit received under the workmen’s compensation act which equals such reduction.

     Overall, it's questionable whether this sort of offset would even save money once you factor in the costs of administration. It's got superficial appeal but it's a dumb idea in my opinion.

Sales Tax And Social Security Representation

     There is a serious threat that the N.C. General Assembly will extend the state's sales tax to services, including legal services, which would include the representation of Social Security claimants. My recollection was that this issue has come up in a few other states and that Social Security's position has been that it's up to the attorney to collect the sales tax as a cost, in the same way that the costs of obtaining medical records are collected. However, I don't see where this has been done in any state other than South Dakota. Has it been done in other states? How has it worked out where it has been done?

Should Seniors Be Scared?

     From The Hill:

Vice President Biden on Friday told Florida seniors that Mitt Romney wants to make them pay $460 more in taxes on Social Security.

“Gov. Romney proposes significant changes, that would result in beneficiaries getting considerably less in their Social Security check in the future," he said, beginning a two-day campaign tour in Florida with a grassroots event at Century Village, a retirement community in Boca Raton. "If Gov. Romney’s tax plan goes into effect, it could mean everyone, everyone, would have to pay more taxes on the Social Security benefits they now receive. The average senior would have to pay $460 more in taxes on their benefits.” ...

The Obama campaign cited estimates from the Tax Policy Center study suggesting that taxpayers making less than $200,000 a year could lose almost 60 percent of their tax preferences under the Romney plan. From that, the campaign estimated that Social Security recipients could take a $458 hit.

For their part, Romney’s campaign has pushed back strongly against the Tax Policy Center study, with the candidate himself saying it reached “a garbage conclusion.”

     You can criticize Biden but until Romney says who will bear the brunt of his tax plans -- and any plan to change taxes that is revenue neutral inevitably cuts some people's taxes while raising those of others -- is Biden making an unfair accusation?

The Wealthy Get A Free Ride

     From a letter to the editor published in Sunday's New York Times:

In a nation that prides itself on fair play and equal opportunity, it seems incongruous that people with wealth-based income — interest, dividends, capital gains, rent — are excused from paying Social Security (traditionally 12.4 percent) and Medicare taxes (2.9 percent) on that income. Equally odd, they do not pay Social Security tax on wages above $110,100. Shouldn’t these taxes be paid on all income? Taxing the “earned” and not the “unearned” seems rather un-American, doesn’t it?

     Now wait for the sharp reaction from the paid shills who are the most ardent posters on this blog.

Pay Up

According to the Internal Revenue Service (IRS), Social Security has 1,913 employees who owe federal taxes totaling $16,426,239. Social Security's delinquency rate, that is the percentage of its employees who owe federal taxes, is 2.99%.

Sensitive -- Not To Be Shared With The Public!

Anybody at Social Security want to explain why this is a big secret?

Identification Number AM-09032 SEN Effective Date: 02/23/2009
Intended Audience: All RCs/ARCs/ADs/FOs/TSCs/PSCs/OCO/ODARHQ
Originating Office: DCBFM OFPO
Title: Delay in Issuance of Forms 1099-MISC to Claimant Representatives
Type: AM - Admin Messages
Program: All Programs

SENSITIVE - NOT TO BE SHARED WITH THE PUBLIC
Retention Date: August 15, 2009

This instruction is intended to address the inquiries from attorneys, eligible non-attorneys, and affiliated entities who were expecting to receive a Form 1099-MISC by January 31, 2009, to report the aggregate fees received via direct payment from SSA during 2008.

Background
Sections 6041 and 6045(f) of the Internal Revenue Code, as implemented by 26 CFR 1.6041-1, require SSA to issue a Form 1099-MISC to each representative who receives, by direct payment from SSA, aggregate fees of $600 or more in the prior calendar year. To comply with this requirement, we developed a new 2-step registration requirement (using the SSA-1699 (Request for Appointed Representatives Direct Payment Information) and SSA-1695 (Identifying Information for Possible Direct Payment of Authorized Fees)) for representatives appointed on or after January 1, 2007, who had not waived direct fee payment, and for attorneys for whom a Federal court approved a fee on or after January 1, 2007. We also developed voluntary registration (using the SSA-1694 (Request for Business Entity Taxpayer Information) for affiliated entities who wished to have the payments reported as taxable income to the entity rather than to the representative.

General information
We had targeted the first issuance of these required Forms 1099-MISC for January 2009 to report the direct fee payments made during calendar year 2008. However, due to unexpected systems limitations, an executive decision has been made to delay issuance of Forms 1099-MISC to representatives for one year. Therefore, we are currently targeting the initial issuance of these Forms 1099-MISC for January 2010 in order to report direct fee payments made during calendar year 2009.

Can anyone tell me who at Social Security is responsible for labeling this sensitive?

Turbotax And Lump Sum Payments Of Social Security Benefits

From TaxMama's TaxQuips:

Today TaxMama hears from Scott in Utah, who’s upset . “My wife and I E-filed using TurboTax online deluxe, reporting a lump sum Social Security payment. We had a refund coming from both fed and state. Then we got an IRS letter telling us ‘We changed the amount of taxable social security benefits on line 20b of your form 1040 because there was an error in the computation of the taxable amount.’ Now we owe a ton of money – and TurboTax says it will take six weeks to review my situation. What do we do now?”

TaxMama Replies

Dear Scott,

Call up IRS and ask them to put a 60-day hold on your file. Tell them that you are working with
your software provider to find the problem. ...

Meanwhile, do pester Turbo Tax and try to run the Lump Sum calculation yourself to see if the number on your tax return was correct. ...

Call TurboTax regularly and make a friendly, but persistent pest of yourself. Remind them that they told MarketWatch.com last year, that their program WILL handle this computation properly – so why should you have to wait six weeks for them to get this to work for you?

While you’re waiting, try to figure out the calculation yourself. Follow IRS’s worksheet on the Social Security lump sum calculation. See Lump Sum – example
http://www.irs.gov/publications/p915/ar02.html .

The Social Security Administration has recently issued new instructions for its employees about taxation of Social Security benefits but failed to mention the problems connected with lump sum payments of back Social Security benefits that cover more than one year. By the way, if your first thought is that the way this is handled is to file amended tax returns for earlier years, your first thought is dead wrong.