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Will This Bill End Social Security Taxes?

Millions rely on Social Security for their financial security in retirement. But what many don't know is that Social Security benefits are subject to tax in certain circumstances. One group of lawmakers is trying to change that.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, talks about a recent bill to end income taxation of Social Security benefits. Dan begins by noting the way that Social Security gets taxed, with those earning over certain income limits having a portion of their benefits added to their taxable income. Yet Dan points out that double taxation is rampant in the U.S. tax system, using the example of the dividend payments that AT&T (NYSE: T  ) , ExxonMobil (NYSE: XOM  ) , and thousands of other companies make to their shareholders. Dan notes that one reason that Visa (NYSE: V  ) , Goldman Sachs (NYSE: GS  ) , and other low-yielding dividend stocks don't have higher payouts is that they choose instead to use stock buybacks to return capital to shareholders in a more tax-friendly way. Dan concludes with his assessment of the likelihood of this bill becoming law, noting that it's important to manage your taxes to minimize the impact of Social Security taxation on your overall tax bill.

Make the most of Social Security
Knowing how to avoid unnecessary Social Security taxation is just one smart way to make more from the benefits you get. In our brand-new free report, "Make Social Security Work Harder for You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (12) | Recommend This Article (8)

Comments from our Foolish Readers

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  • Report this Comment On January 26, 2014, at 8:41 PM, meeeto wrote:

    It was Ronny Reagan with the help of a turn coat democrat Tip O'Neal that started taxing SS benefits!!!! And then raised the age when you can collect!!!!

  • Report this Comment On January 26, 2014, at 9:07 PM, Mentallect wrote:

    It is double taxations, but when the corporate tax rate dropped during the Reagan Administration, tax revenues had to be raised somewhere else, but even that didn't stop Reagan from becoming the grandfather of the Trillion dollar deficit.

    If corporate tax loopholes and Cayman Island/Swiss bank account holding Americans actually contributed to America, SS taxation would have been extinct 2 decades ago.

  • Report this Comment On January 26, 2014, at 9:19 PM, toomuchgas wrote:

    I don't believe any bill to reduce taxes has a chance with this administration. However, any attempt to raise taxes will be heartily embraced.

  • Report this Comment On January 26, 2014, at 11:56 PM, lobo30214 wrote:

    The Estate Tax is also an example of double taxation.

  • Report this Comment On January 27, 2014, at 1:11 AM, cid wrote:

    Everything is taxed. No one can blame Obama. This country was a mess when he took over.

  • Report this Comment On January 27, 2014, at 3:27 AM, gadfly1000 wrote:

    1) People did NOT pay income tax on the 50% of the contribution made by employers.

    2) By law, ALL of the income tax paid on Social Security pensions goes right back into the Social Security fund to be paid out as pensions. It does not go to the general fund.

    A REAL reform would be to index the thresholds that kick in the tax on Social Security pensions. They have NEVER been raised to account for inflation and are 30 and 20 years old!!! The fixed thresholds suck more and more people into taxation of their benefits.

    3) Corporations pay tax on their income, you pay tax on your income (dividends). That is NOT double taxation, any more than it is double taxation for corporations to pay taxes on income derived from companies that supply them with goods and services and have already paid taxes on THEIR income.

  • Report this Comment On January 27, 2014, at 8:00 AM, scipiojr wrote:

    People who are drawing an SS check alone pay little if any tax. But if you do have outside income added on then of course you should pay income tax. Some recipients have substantial incomes?

  • Report this Comment On January 27, 2014, at 11:20 AM, marker585 wrote:

    Reagan made substantial changes to taxation in America and this is one of them. What people forget is that Reagan pragmatic and a compromiser, as was Clinton. That's the nature of American govt and that's what the Founders intended. The Tea Party has changed this whole dynamic which is not to compromise.

    I loved the comment about Reagan being the grandfather of the trillion dollar deficit. I often find it shocking that arch conservatives ignore the massive deficit created by Reagan. The total US national debt was less than one trillion (about $930 billion) when he was elected but when he left it was $2.7 trillion. A massive change for the time. And as I see it, legitimizing excessive spending. Plus let's not forget the mantra, "that deficits don't matter" as spoken by Cheney years later. Yet now, we see deficits do matter.

    Reagan did start taxation of SS for "windfall" earners who had other sources of income, adjusted the age equation and raised SS payroll taxes for all workers. All wise moves in my opinion. And, yes, I do pay taxes on my SS since I'm a "windfall" earner.

    Reagan also reformed the federal govt retirement program, requiring all new employees to fund their own retirements via a 401k (thrift savings plan) plus pay into SS. That program extends to our elected Congressional members too as they are regarded as federal employees.

  • Report this Comment On January 27, 2014, at 11:52 AM, Patriot wrote:

    Social Security Cards up until the 1980's expressly stated the number and Card were not to be used for identification purposes. Since nearly everyone in the United States now has a number, it became convenient to use it anyway and the message,

    Our Social Security

    Franklin Roosevelt, a Democrat, introduced the Social Security (FICA) Program. He promised:

    1) That participation in the Program would be completely voluntary, No longer Voluntary !

    2) That the participants would only have to pay 1% of the first $1,400 of their annual incomes into the Program,

    Now 7.65% On the first $90,000 !

    3) That the money the participants elected to put into the Program would be deductible from their income for tax purposes each year,

    No longer tax deductible !

    4) That the money the participants put in went to the Independent 'Trust Fund' rather than into the General Operating Fund, and therefore, would only be used to fund the Social Security Retirement Program, and no other Government program, and,

    Under Johnson the money was moved to The General Fund and spent. !

    5) That the annuity payments to the retirees would never be taxed as income.

    Under Clinton & Gore up to 85% of your Social Security can be taxed !

    Since many of us have paid into FICA for years and are now receiving a Social Security check every month -- and then finding that we are getting taxed on 85% of the money we paid to the Federal government to 'put away -- you may be interested in the following:

    Q: Which Political Party took Social Security from the Independent 'Trust Fund' and put it into the General Fund so that Congress could spend it?

    A: It was Lyndon Johnson and the Democratically controlled House and Senate.

    Q: Which Political Party eliminated the income tax deduction for Social Security (FICA) withholding?

    A: The Democratic Party.

    Q: Which Political Party started taxing Social Security annuities?

    A: The Democratic Party with Al Gore casting the 'tie-breaking' deciding vote as President of the Senate, while he was Vice President of the U.S.

    Q: Which Political Party decided to start giving annuity payments to immigrants?

    (AND MY FAVORITE):

    A: That's right!

    Jimmy Carter and the Democratic Party.

    Immigrants moved into this country, and at age 65, began to receive Social Security payments! The Democratic Party gave these payments to them, even though they never paid a dime into it!

    And this info can all be validated as FACT !

    IN GOD WE TRUST !!.....Not the Democrats

  • Report this Comment On January 27, 2014, at 12:12 PM, yooperintx wrote:

    Patriot - How about doing a bit of research before making comments that are totally false. Just go to the SS web site and go to History of Social Security and start reading, maybe you would learn something.

  • Report this Comment On January 27, 2014, at 1:01 PM, Govt4thegovt wrote:

    Will This Bill End Social Security Taxes?

    lets pray it does! things is getting way out of control !

    its time we the people stand up and put the boots to these thieves.

  • Report this Comment On January 27, 2014, at 5:08 PM, pns123 wrote:

    It is all well and good to look for places where taxes can be lowered or eliminated. I'll be starting SS soon, so it sounds good to me.

    But, alas. Somebody has to pay the taxes. So I am not optimistic that this tax will go away.

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Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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