It took nearly all year to accomplish, but President Trump and the GOP logged their first major legislative victory in late December with the signing of the Tax Cuts and Jobs Act into law. This fulfills at least one of a handful of promises made by Trump on the campaign trail.
The Republican tax law brings with it a mighty 10-year deficit estimate
The tax reform passed by congressional Republicans represents the first major overhaul to the U.S. tax code in about three decades’ time. It now permanently lowers the peak corporate income-tax rate to 21% from 35%, which had been among the highest in the world, while also lowering the individual federal income-tax rates. At the same time, the individual tax code was simplified by nearly doubling the standard deduction and eliminating a host of credits and deductions.
Though the GOP seems thrilled with the new tax law, economists aren’t as upbeat. The Joint Committee on Taxation estimates that the Tax Cuts and Jobs Act will add $1.5 trillion to the federal deficit over the next decade. Mind you, this $1.5 trillion includes the positive impacts from wage growth, job creation, and GDP growth touted by President Trump. Essentially, it means that Republicans may need to find additional ways to cut expenditures in the future, or perhaps to raise revenue, in order to minimize or eliminate this deficit.
One notable way the GOP should make headway is through the repeal of the individual mandate, which was part of the new tax law. The individual mandate is the actionable component of the Affordable Care Act requiring that Americans purchase health insurance or face a penalty. Without this penalty coercing consumers to purchase health insurance, it’s believed that millions will drop out of insurance markets in the years to come. Fewer insured Americans means the federal government won’t have as much liability in terms of supplying subsidies for the Advance Premium Tax Credit. This is what lowers premiums for low- and middle-income consumers and families. Repealing the individual mandate is expected to save $338 billion over 10 years.
But more changes may be needed in order to make ends meet; in the absence of meaningful changes to tax revenues, an unpopular provision that allows for the taxation of Social Security benefits in certain circumstances will most likely need to be left in place.
This 35-year-old Social Security rule is hitting middle-income seniors right in the pocketbook
But the GOP’s agenda may wind up at odds with the public’s wishes. For example, Social Security beneficiaries, and groups representing the interests of seniors, such as The Senior Citizens League (TSCL), have long requested that Congress make adjustments to the rules concerning the taxation of Social Security benefits.
In April 1983, the Reagan administration passed the last sweeping reform of Social Security, which, among other things, allowed for the taxation of Social Security benefits if taxpayers crossed certain earned-income thresholds. Single taxpayers who earned $25,000 or more in income, and couples filing jointly with more than $32,000 in earned income, would have half of their Social Security benefits exposed to federal income tax. In 1993, under the Clinton administration, a second tier was added that allowed 85% of Social Security benefits to be exposed to federal taxation if single taxpayers made more than $34,000 (or over $44,000 for couples filing jointly).
When the taxation of benefits was implemented, it affected only around 1 out of 10 senior households. But, almost 35 years later, it now impacts around 56%, according to TSCL. The reason? The aforementioned income thresholds of $25,000 for single taxpayers and $32,000 for couples filing jointly have never been adjusted for inflation. Thus, with each passing year, more seniors finds themselves subject to an archaic tax rule.
Changing this rule is probably out of the question
Some would argue that adjusting these figures for inflation would mean more money in the pockets of middle-income seniors who need it most. But there are two likely reasons why this nearly 35-year-old rule is more unlikely to be changed than it’s ever been.
First, Social Security already has issues of its own. The latest annual report from the Social Security Board of Trustees estimates that there’s a $12.5 trillion budget shortfall between 2034 and 2091. Unless beneficiaries want to face a cut in benefits of up to 23% by 2034, lawmakers have to look at real ways to increase revenue. Adjusting the taxation of benefit thresholds higher for inflation would result in a reduction of collected revenue at a time when it’s sorely needed.
Secondly, and by a similar token, the federal government needs every dollar in tax revenue it can collect following the passage of the new tax law. Even though the taxation of benefits generated “only” $32.8 billion for the program last year ($957.5 billion was collected, most of which came from Social Security’s payroll tax), adjusting the thresholds for inflation would presumably grow, not shrink, the federal deficit over the next decade.
I’m sorry to say, folks, but many of you are probably going to be stuck paying federal income tax on your Social Security benefits for many more years to come.
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