We are all familiar with the effects of indexing under the federal tax laws. On the most common and basic level, the threshold for the various tax brackets typically increases, at least a little bit, each new year. This means that it takes a little more income before you move into that next higher tax bracket. Other impactful indexing occurs with the estate tax, which has an increased exemption every year.
Though this indexing makes sense in many ways it does NOT extend to all aspects of federal taxation and often causes problems for taxpayers. For example, until recently the AMT – alternative minimum tax, created to ensure high earning taxpayers did not escape taxation – was not indexed for inflation. This led to the obvious increase in the number of taxpayers subject to the complications and extra expense of this tax, many of whom were not the persons or the income levels to which the tax was originally intended to apply.
One area of the tax law where there is no indexing (and which impacts millions of taxpayers in an increasingly negative way) is in the calculation of how much of one’s Social Security benefits are to be included in taxable income. The threshold for inclusion of at least some benefits in taxable income is fairly low – provisional income $25,000 for singles and $32,000 for joint filers. Where provisional income for singles is over $34,000 and for joint filers over $44,000, up to 85% of Social Security benefits will be taxable. (Provisional income includes only half of the total Social Security benefit in addition to other items of income). These thresholds have not changed for years with the result that more and more retired persons are required to give up increasing amounts of their benefits, even if their income is not significant.
This oversight – whether deliberate or not – is something elder advocacy groups should consider addressing by lobbying for consistency in the application of indexing and moderate relief for the retired taxpayer.