Saturday, December 29, 2012

Social Security a Federal Benefit?

There has been an email floating around urging the recipients to forward it to their friends, disputing that Social Security is a "Federal Benefit Payment", see below.

While it's probably politically incorrect to disagree with that allegation since most people do believe they are just receiving what they have already paid into the system when they retire, unfortunately, that is simply not true.

Today, most new Social Security recipients receive their full benefit when they reach age 66.  The average life expectancy in the U.S. today is 78.5 (see  So on average, a recipient receives 12.5 years of full benefit.

Let's just accept, for now, the example given in the email, an average worker making 30K a year over a 40 year working life would have paid in $180,000 between his own contribution and his employer's matching contribution.  Amortize that $180,000, earning 3%, over 12.5 years, the monthly payment is 1,440.51, not the $3,277 amount claimed by the email.

And $375 per month for 480 months at 1% per annum (0.0833333 per month) would yield $221,209.30, not the $1.3 million figure the email alleges.

On top of that, there are several other errors in the assumptions made by email.

Social Security is calculated based on the highest 35 years of indexed earnings (  There is a maximum amount of wages subject to Social Security called the wage ceiling.  The wage ceiling did not reach $35,000 until 1983, or 30 years ago. Additionally, the email assumes a combined social security tax rate of 15% for all those years.  The fact is the Social Security tax rate is much lower than that during the last 35 years.  Other than 2011 and 2012 where workers enjoyed a 2% Social Security tax holiday, the maximum tax rate since 1990 for employee has been 6.2%.  So even if one includes the employer matching contribution, the tax rate was no more than 12.4%.  The combined tax rate 35 years ago in 1978 was 7.1%, with the employee paying 3.55% and the employer paying 3.55% (  So the $180,000 amount is way over-stated.

On top of that, to include the employer matching fund in the calculation is questionable.  Without a federal mandate, I am not aware of any employer who is that generous, matching employee's contribution dollar for dollar.  Even if one considers the employee has earned that matching contribution, the employee has not paid any income tax on that matching contribution.  Besides, most people I know live well beyond age 78.5.

Social Security is also skewed toward low income taxpayers.  Basically, it's a set of calculations that helps level the playing field between lower wage earners and higher wage earners. For instance, low wage earners who retired at age 66 will receive benefits of about 56 percent of their pre-retirement income; for medium wage earners, the figure is about 34 percent; and for high wage earners, it is just over 15%.  Let's take a look at an example:

For a worker with average indexed monthly earnings (AIME) of $3,585 retiring in 2013, he would receive $1,605.90 per month, calculated as follows: 90% of $791 + 32% of ($3585 - $791), rounding the result down to the nearest dime.

For those with AIME over $4,768, they only receive 15% of the excess.  See

There is also a "special minimum" benefit for certain individuals who've had long periods of relatively low earnings.

There are additional Social Security benefits.  For example, a worker whose spouse does not work outside the home or works very little outside the home, his/her spouse is entitled to 50% of the worker's monthly benefit amount.  And when a worker dies, his/her surviving spouse may be able to take over the decedent's Social Security benefits.  There are also benefits for an eligible divorced spouse.  A child under age 18 is entitled to collect Social Security if the worker becomes disabled.  And of course, there is a Social Security Disability Benefit for the worker as well.

And now, there have been rumors that future Social Security may be based on needs, i.e., means testing.

So my conclusion is that Social Security is a Federal Benefit Program, even though we contribute into it while we work.  The benefits for most people are far greater than what they have contributed.  Lastly, Social Security has always been labeled a "Federal Benefit Payment", this is not new.

Here is the email:


Have you noticed, your Social Security check is now referred to as a "Federal Benefit Payment"?

I'll be part of the one percent to forward this. I am forwarding it because it touches a nerve in me, and I hope it will in you. Please keep passing it on until everyone in our country has read it.

The government is now referring to our Social Security checks as a Federal Benefit Payment. This isn't a benefit, its earned income! Not only did we all contribute to Social Security but our employers did too.

It totaled 15% of our income before taxes. If you averaged $30K per year over your working life, that's close to $180,000 invested in Social Security. If you calculate the future value of your monthly investment in social security ($375/month, including both your and your employer's contributions) at a meager 1% interest rate compounded monthly, after 40 years of working you'd have more than $1.3+ million dollars saved!
This is your personal investment.

Upon retirement, if you took out only 3% per year, you'd receive $39,318 per year, or $3,277 per month. That's almost three times more than today's average Social Security benefit of $1,230 per month, according to the Social Security Administration (Google it - it's a fact).

And your retirement fund would last more than 33 years (until you're 98 if you retire at age 65)! I can only imagine how much better most average-income people could live in retirement if our government had just invested our money in low-risk interest-earning accounts.

Instead, the folks in Washington pulled off a bigger Ponzi scheme than Bernie Madoff ever did. They took our money and used it elsewhere. They "forgot" that it was OUR money they were taking. They didn't have a referendum to ask us if we wanted to lend the money to them.

And they didn't pay interest on the debt they assumed. And recently, they've told us that the money won?t support us for very much longer. But is it our fault they misused our investments?

And now, to add insult to injury, they're calling it a "benefit," as if we never worked to earn every penny of it. Just because they "borrowed" the money, doesn't mean that our investments were a charity!  Let's take a stand.

We have earned our right to Social Security and Medicare. Demand that our legislators bring some sense into our government.  Find a way to keep Social Security and Medicare going, for the sake of that 92% of our population who need it.

Then call it what it is: Our Earned Retirement Income.

99% of people won't forward this.
Will you?

Wednesday, December 5, 2012

IRS Proposed Regulations on Obamacare

CCH Explanation:

New 3.8 Percent Tax on Investment Income

0.9 Percent Additional Medicare Tax

2.3% Excise Tax on Medical Device

Rules Relating to Additional Medicare Tax

Disclosure of tax return information on eligibility requirements for health insurance affordability programs

Additional Requirements for Charitable Hospitals

Here is a link to the IRS web site on its various news releases and guidance on Obamacare:,-Multimedia-and-Legal-Guidance

Monday, December 3, 2012

Alternative minimum tax may get new patch
Kathleen Pender, Chronicle Columnist

Nobody likes the alternative minimum tax - an alternative tax system that was originally designed to make sure wealthy people who used a lot of esoteric tax shelters paid some federal income tax. Most of those shelters are gone now and the AMT is mainly hitting higher-income people who pay a lot of state income and real estate taxes and, to a lesser extent, families with a lot of children.

Taxpayers are supposed to compute their taxes under both the AMT and the regular system and pay whichever is higher. Although AMT rates are lower - the top rate is 28 percent compared with a maximum rate of 35 percent under the regular tax system (or 39.6 percent if the Bush tax cuts expire) - fewer deductions are allowed under the AMT.

The result is that most higher-income people owe AMT, especially if they live in high-tax states. Nationwide, only 2.8 percent of tax returns filed in 2010 owed AMT, but 4.5 percent of those coming from California did. Among those in California with adjusted gross income between $200,000 and $1 million, about 85 percent owed AMT. Above $1 million it is somewhat less common because the super-rich often owe more under the regular tax system.

The AMT has been in the news lately because Congress still has not passed a so-called patch that would prevent it from reaching further down into the middle class and hitting an estimated 33 million taxpayers in 2012 compared with about 4 million in 2011. Most people think Congress will pass a patch.

What's less well known is that for some people, the AMT has a silver lining. Assuming Congress passes a patch for 2012 and 2013, people who are in AMT and stay in AMT will be somewhat protected from an increase in regular income tax rates if the Bush-era tax cuts expire.

That's because they will still be paying a top AMT rate of 28 percent even if the top regular rate goes to 39.6 percent. This won't be true for everyone in AMT; people who fall out of the AMT could see their taxes go up.

To understand why, you have to know how the tax is computed.

To calculate AMT, you start with your taxable income under the regular tax system, then add back deductions not allowed under the AMT. This includes state and local income and property taxes, miscellaneous itemized deductions and the personal exemptions you get for yourself, spouse and dependents.

How AMT works

From this, you subtract a flat amount known as the AMT exemption (which phases out over a certain income level).

If what is left is greater than zero, you calculate a tentative AMT at a rate of 26 percent up to a certain amount of income and 28 percent over that. If this is bigger than your regular income tax, you pay the excess as an additional tax. That additional tax shows up on tax returns as alternative minimum tax.

The amount can be substantial: In 2010, people with $200,000 to $500,000 in adjusted gross income who were subject to AMT paid an extra $6,150, on average.

The Bush tax cuts reduced regular marginal tax rates, but left the AMT, including the exemption amount, alone. As regular taxes came down and people's incomes grew, more people got pushed into AMT.

Several patches

To prevent it from falling into the middle class, Congress has been passing temporary, one-year increases in the exemption amount at the end of each year. This is the patch.

For 2011, the exemption was $74,450 for married couples filing a joint return and $48,450 for singles. If Congress passes a patch for 2012, which is expected, those amounts would rise about 2.4 percent for 2012 and the AMT would hit roughly the same number of people as in 2011.

Without a patch, the amounts would revert to $45,000 for couples and $33,750 for singles - and throw about 29 million more people into AMT.

Among people with $75,000 to $100,000 in income, the percentage subject to AMT would rise from 1 percent to 52 percent, and their average tax increase would be about $1,600, according to Bob McIntyre, director of Citizens for Tax Justice. Even so, the bulk of the alternative minimum tax - 82 percent - would still be paid by people making more than $100,000, he says.

Congress is expected to patch the AMT by raising the exemption amount this year, but what happens next year?

If Congress approves another patch for 2013 but the Bush tax cuts expire and regular rates go up, many people who are in AMT will be somewhat protected from higher taxes if they are still in AMT next year; their tax rate will still be 28 percent.

Unusual possibilities

People who are in AMT now but go back into the regular tax system if the Bush tax cuts expire would see a tax increase. This could, perversely, make them "nostalgic for the AMT," says Patrick Geddes, chief investment officer with Aperio Group.

This could happen to people who are on the borders of AMT at both the high and low end of the income spectrum.

Republicans have proposed extending all of the Bush tax cuts; President Obama favors letting taxes go up only for people making more than $250,000 (married) or $200,000 (single).

If Obama's plan wins, some people with incomes above $200,000/$250,000 won't be affected because they will still be in AMT, paying a top rate of 28 percent (assuming that rate does not change). "If you are deep into AMT, you are not going to be affected," Geddes says. "AMT may make the debate (over marginal tax rates) moot for a lot of high-end taxpayers."

Take a hypothetical married couple with two children and $400,000 in income, including $5,000 in long-term capital gains and $5,000 in qualified dividends. They have $70,000 in itemized deductions, including $45,000 in state income and property taxes.

In 2012, they would owe $93,900 in taxes, according to CCH, a tax information firm.

In 2013, under the Obama plan, their regular marginal rate would rise to 36 from 33 percent, but they would still be in AMT. Their tax bill would go up by $900, less than a 1 percent increase.

(The example assumes the AMT exemption is patched at $78,750 for 2012 and 2013 and that capital gains are taxed 20 percent and dividends are taxed as ordinary income in 2013.)

What happens to any individual depends on their unique circumstances. Taxpayers can use calculators at the Tax Policy Center ( or Tax Foundation ( to estimate their tax under various scenarios, but it helps to know something about taxes and the policy options.

If Congress overhauls the tax system, all bets are off. The AMT could be abolished or replaced with some better way of making sure that the super-rich don't pay a lower effective tax rate than people earning less.

Who pays AMT?

Only 2.8 percent of federal tax returns filed in 2010 owed alternative minimum tax, but 4.5 percent of returns from California had it. AMT is most common among taxpayers with $200,000 to $1 million in income.

Adjusted gross income Calif. returns with AMT U.S. returns with AMT
500,000-1 million86.667.3
Over 1 million40.028.6
Source: Internal Revenue Service statistics

Kathleen Pender is a San Francisco Chronicle columnist. Net Worth runs Tuesdays, Thursdays and Sundays. E-mail: Blog: Twitter: @kathpender