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109 IRET Congressional Advisory 1 (2000)

handle is hein.taxfoundation/iretcgadv0106 and id is 1 raw text is: Conresina August 7, 2000 No. 109 HOUSE WOULD TERMINATE TOP TIER TAX ON SOCIAL SECURITY BENEFITS' On July 27, the House of Representatives voted to repeal the second tier of tax on up to 85% of Social Security benefits received by middle and upper income beneficiaries. The tax On July 2 reduction would total $117.4 Rep resentativ billion over 10 years. The second tier vote was 265-159; there were of Social Secw 213 Republicans and 52 by middle a Democrats in favor. The beneficiaries. margin, while large, was not enough to over-ride a Presidential veto. The bill must now be considered in the Senate. 1, th of tax iity be ndi Social Security benefits are currently subject to two tiers of taxation, on up to 50% or 85% of benefits depending on the income of the recipient. The 1983 Social Security Amendments imposed taxes on up to half of Social Security benefits for single retirees with modified adjusted gross income (MAGI) over $25,000 and for couples with MAGI over $32,000. Affected retirees must add 50 cents in benefits to taxable income for every dollar by which their MAGI exceeds these thresholds until half of their benefits become subject to tax. (MAGI includes all ordinary adjusted gross income, plus half of Social Security benefits, plus income from tax exempt bonds.) The revenues from this tier of tax are dedicated to the Social Security retirement trust fund. The tax section of the Omnibus Budget Reconcilia- e House of tion Act of 1993 added a d to repeal the second tier of tax. Single on up to 85% retirees with MAGI above )nefits reeived $34,000 and couples with ipper income MAGI over $44,000 must add 85 cents in benefits to taxable income for every dollar of MAGI above these thresholds until 85 percent of their benefits become subject to tax. The 1993 Act passed the Senate when Vice President Gore cast the tie- Repeal of the second tier of the tax on Social Security would be an important step, because the peculiar method employed to tax Social Security benefits imposes some of the highest and most destructive marginal tax rates in the entire tax code. Ideally, The taxation of benefits is really a tax on the other retirement income that pushed the retiree over the threshold and triggered the tax, and it falls on that income with an above normal marginal tax rate. the rest of the tax on Social Security benefits would be replaced with less destructive tax treatment too. breaking vote. It is this added layer of tax on benefits that the House voted to repeal. The revenue from this tier is dedicated to the Medicare trust fund. The bill would hold Medicare harmless by crediting the Medicare trust fund with an equal amount of other tax revenue, in effect using some future general revenues to pay a portion of Medicare outlays. Institute for Research on the Economics of Taxation IRET is a non-profit, tax exempt 501(c)(3) economic policy research and educational organization devoted to informing the public about policies that will promote economic growth and efficient operation of the free market economy. 1730 K Street, N., Suite 910, Washington, D.C. 20006 Voice 202-463-1400 e Fax 202-463-6199 0 Internet www. ret.org

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