A "sneaky" way of raising taxes
A few numbers to begin with
$25,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $62,262 today.
$32,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $79,696 today.
We'll come back to these numbers in a bit.
* * *
In 1982, the Internal Revenue Code was changed. The change modified the "minimum tax" that had been enacted in 1969 into what we know today as the Alternative Minimum Tax (AMT). It was supposed to ensure that the "rich" pay their "fair share" of income taxes. What that share is has been the subject of intense debate since the income tax was signed into law.
Many argue that the wealthy already pay an outsized share of income taxes, as shown in this chart from the Tax Foundation:
This blog is not designed to review and discuss what that fair share is, but I will say that this chart is misleading. Why? Because the more than 1/5th of all Adjusted Gross Income (AGI) earned by the top 1% in 2014 does not include their income from tax-exempt investments like municipal bonds. According to Thomson Reuters, on 12/312008 there was $2.67 trillion in outstanding municipal bonds. The same source reports that there were $61.9 billion in such bonds issued in the first quarter of 2018, a decline of 54.6% from the $136.4 billion issued the previous quarter. Based on those numbers, the total amount of outstanding municipal bonds has grown significantly in the last decade.
If we make conservative estimates that the total now sits at $4 trillion and they are yielding only 3% per annum, that means the holders of these bonds (held by people in every income bracket but concentrated among the most wealthy) is generating $120 billion in untaxed income annually.
* * *
I've digressed. Back to the AMT. When it came into being in its present form in 1982, the Exemption Amount was $45,000 for taxpayers who were married filing jointly (MFJ), $33,750 for unmarried taxpayers and $22,500 for taxpayers who filed as married filing separately (MFS).
Those amounts were not indexed (adjusted for inflation) until 2001, and until the year 2012, they were subject to the whims of patchwork legislation each year. Now, the AMT exemption amount is somewhat indexed for inflation.
$45,000 in 1982 = $115,732 in 2018. 2018 MFJ AMT exemption amount is $109,400
$33,750 in 1982 = $86,789 in 2018. 2018 unmarried AMT exemption amount is $70,300
$22,500 in 1982 = $57,866 in 2018. 2018 MFS AMT exemption amount is $54,700.
Still, the percentage of Americans who are subjected to the AMT has grown dramatically since its inception.
* * *
What Congress has done for the AMT, it has not done for a much more important number. That number being the amount of other income one can earn before their Social Security (Social Insecurity for those who prefer that label) benefits become subject to being partially taxable.
As personal finance columnist Liz Weston writes, the amounts of "combined income" one can earn when receiving Social Security benefits (either retirement or disability benefits) before those benefits become partially taxable have not been indexed for inflation since the government began taxing Social Security in 1983.
$25,000 for unmarried taxpayers
$32,000 for married taxpayers.
Now what would those amounts be when indexed for inflation? I repeat:
So what is this combined income calculation? You take 1/2 of the Social Security benefit and add it to all other income (including income from the previously discussed tax-exempt income) and if that number is more than $25,000, an unmarried individual will be taxed on 50% of their Social Security benefits. The number for MFJ filers is $32,000.
When those numbers exceed $34,000 and $44,000 respective, the portion of Social Security subject to income tax rises to 85%.
By not indexing those thresholds for inflation over the last 35 years, Congress has increased the amount of income tax paid by recipients of Social Security who earn more than the allowable amount of combined income.
Why more people aren't up in arms about this escapes me.
$25,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $62,262 today.
$32,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $79,696 today.
We'll come back to these numbers in a bit.
* * *
In 1982, the Internal Revenue Code was changed. The change modified the "minimum tax" that had been enacted in 1969 into what we know today as the Alternative Minimum Tax (AMT). It was supposed to ensure that the "rich" pay their "fair share" of income taxes. What that share is has been the subject of intense debate since the income tax was signed into law.
Many argue that the wealthy already pay an outsized share of income taxes, as shown in this chart from the Tax Foundation:
This blog is not designed to review and discuss what that fair share is, but I will say that this chart is misleading. Why? Because the more than 1/5th of all Adjusted Gross Income (AGI) earned by the top 1% in 2014 does not include their income from tax-exempt investments like municipal bonds. According to Thomson Reuters, on 12/312008 there was $2.67 trillion in outstanding municipal bonds. The same source reports that there were $61.9 billion in such bonds issued in the first quarter of 2018, a decline of 54.6% from the $136.4 billion issued the previous quarter. Based on those numbers, the total amount of outstanding municipal bonds has grown significantly in the last decade.
If we make conservative estimates that the total now sits at $4 trillion and they are yielding only 3% per annum, that means the holders of these bonds (held by people in every income bracket but concentrated among the most wealthy) is generating $120 billion in untaxed income annually.
* * *
I've digressed. Back to the AMT. When it came into being in its present form in 1982, the Exemption Amount was $45,000 for taxpayers who were married filing jointly (MFJ), $33,750 for unmarried taxpayers and $22,500 for taxpayers who filed as married filing separately (MFS).
Those amounts were not indexed (adjusted for inflation) until 2001, and until the year 2012, they were subject to the whims of patchwork legislation each year. Now, the AMT exemption amount is somewhat indexed for inflation.
$45,000 in 1982 = $115,732 in 2018. 2018 MFJ AMT exemption amount is $109,400
$33,750 in 1982 = $86,789 in 2018. 2018 unmarried AMT exemption amount is $70,300
$22,500 in 1982 = $57,866 in 2018. 2018 MFS AMT exemption amount is $54,700.
Still, the percentage of Americans who are subjected to the AMT has grown dramatically since its inception.
* * *
What Congress has done for the AMT, it has not done for a much more important number. That number being the amount of other income one can earn before their Social Security (Social Insecurity for those who prefer that label) benefits become subject to being partially taxable.
As personal finance columnist Liz Weston writes, the amounts of "combined income" one can earn when receiving Social Security benefits (either retirement or disability benefits) before those benefits become partially taxable have not been indexed for inflation since the government began taxing Social Security in 1983.
$25,000 for unmarried taxpayers
$32,000 for married taxpayers.
Now what would those amounts be when indexed for inflation? I repeat:
$25,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $62,262 today.
$32,000 in 1983 adjusted for inflation by the U.S. Bureau of Labor Statistics CPI calculator equals the buying power of $79,696 today.
So what is this combined income calculation? You take 1/2 of the Social Security benefit and add it to all other income (including income from the previously discussed tax-exempt income) and if that number is more than $25,000, an unmarried individual will be taxed on 50% of their Social Security benefits. The number for MFJ filers is $32,000.
When those numbers exceed $34,000 and $44,000 respective, the portion of Social Security subject to income tax rises to 85%.
By not indexing those thresholds for inflation over the last 35 years, Congress has increased the amount of income tax paid by recipients of Social Security who earn more than the allowable amount of combined income.
Why more people aren't up in arms about this escapes me.
posted by me at 4:29 PM
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