Friday, May 11, 2018

"Taxed to Death"

"Taxed to Death"
by Brian Maher

"If taxes are the price to pay for civilization... we begin to suspect civilization nears perfection in the United States of America. The Congressional Budget Office (CBO) estimates Uncle Samuel hauled aboard a record $515 billion in taxes last month. April tax receipts alone ran as much as $40 billion higher than CBO projections. Individual income and payroll taxes rose $73 billion - or 20% - over last April.

Meantime, the federal government “only” expended $297 billion last month. The happy result is what is known as a budget surplus - a record $218 billion surplus, in fact. The previous record was $190 billion… established in April 2001.

Can we credit President Trump for the tax bonanza? The Epoch Times: "The economy has been on a streak of exceeding expectations thanks partly to the “Trump effect” - a boost to confidence in the economy linked to Trump’s cuts to regulations, taxes and planned investment in infrastructure." Let us lift a modest hymn of praise for the president!

But are we too bedazzled by April’s record surplus to glance the entire portrait? 

April had its $297 billion record surplus, yes. 
January had its own $49 billion surplus. 
But February turned in a $215 billion budget deficit. 
And March registered a $209 billion deficit. 

Our rudimentary mathematics thus reveals a combined $78 billion budget deficit on the year. If the books are to balance… an additional dose of civilization is required. The tax haul must increase, that is - or spending must fall.

Will spending… fall? Hell will fall below 32 Fahrenheit first… and its occupants will first fall to pneumonia.

Overall federal spending has risen 8% since last April.
“Defense” spending has increased 11%.
Social Security benefits rose 5%... Medicaid benefits, 10%.
Were you aware that interest payments on the national debt have increased 21% since April last?

And lest you forget… In February, Congress reached a resolution to spend an additional $300 billion over the next two years. If increased economic activity from tax cuts is to fund it all… the famous Laffer curve is in for heavy duty.

The CBO projects an additional $12.4 trillion of debt over the next decade. What are the greatest burglars of America’s fiscal future? Social Security, Medicare and Medicaid… with interest on the debt into the bargain. These black holes alone could devour some 78% of the federal budget by 2026.

Let us look to the farther horizon... According to an authority no less than the United States Treasury, projected taxes to fund Social Security and Medicare over the next 75 years fall $46.7 trillion short. “Unfunded liabilities” is the term.

But even these $46.7 trillion of unfunded liabilities may only give a faint hint of America’s true indebtedness. Economist and Boston University professor Larry Kotlikoff insists Social Security, Medicare and Medicaid aren’t fully accounted for in official crunching. Accounting shell games mask the entire business, says Kotlikoff. Give a true accounting and what is America’s true debt?

Over the next 75 years, this glum Gus projects America’s true debt at a cosmic $211 trillion.

Kotlikoff, shoulders slumped under the weight of his own words: "We have all these unofficial debts that are massive compared with the official debt. We’re focused just on the official debt, so we’re trying to balance the wrong books. We’re not broke 50, 30 or 10 years from now. We’re broke today. It [the fiscal gap] equals the difference (in present value) between all projected future expenditures and all projected future taxes. If you add up all the promises that have been made for spending obligations, including defense expenditures, and you subtract all the taxes that we expect to collect, the difference is $211 trillion. That’s the fiscal gap. That’s our true indebtedness."

Here we approach a twilit neverland in which numbers become meaningless. To close this intergalactic gap, says Kotlikoff, the following is required: Either a 53% immediate and permanent hike in all federal taxes or an immediate and permanent 33% cut in all federal expenditures.

May we call upon you for a favor? Please rouse us when the American people agree to a 53% tax hike… or an immediate and permanent 33% spending cut.

When Justice Oliver Wendell Holmes said taxes are the price we pay for civilization (1904), the average American tax rate was 3.5%. Even in light of the tax cuts, today’s average American worker’s contribution to civilization runs to perhaps 32%. Many contribute more. And rising deficits promise higher taxes in the years to come.

How much more civilization can America take? We further wonder... How does a civilization survive if it taxes itself to death?

Below, income specialist Nilus Mattive shows you how much you’re being taxed for Social Security and Medicare. The answer may surprise you - and not happily. Read on."
"A Slap in the Face to Millions of Boomers"
By Nilus Mattive

"You might be surprised how much of your income Social Security and Medicare taxes eat up every year. Social Security alone takes 12.4% of every American’s income up to a total limit of $15,921.60 in 2018. That’s a lot of money. But what if you’re self-employed? Social Security and Medicare taxes actually take a full 15.3% of your earnings.

In 2018, 12.4% of your money goes into the Old-Age, Survivors, and Disability Insurance (OASDI) fund - generally known as the Social Security tax - on self-employment income up to $128,400. Then, on top of that, another 2.9% of your earnings goes toward the Medicare Hospital Insurance portion of the self-employment tax… and there is no limit on how much money is subject to this tax.

You must pay all of this tax if you are the owner of a small business that is a sole proprietorship (including independent contractors), a partner in a partnership, or a member of a limited liability company (LLC).

For example, let’s assume you earn $80,000 in your business. You’ll have to kick in $9,920 for Social Security plus another $2,320 for Medicare. Total? $12,240 - more than $1,000 a month. That’s a lot when you’re starting a new business. And the Treasury Department wants its money every three months even if you’re receiving Social Security benefits!

The one good piece of news is that you also get to take a deduction for half of what you’re paying in. Reason: The half that employers are paying in on behalf of their employees isn’t counted as income, either.

Whether you’re self-employed or not, many people are okay with the whole process because they expect to collect back out of the system when they retire. There’s just one other dirty little secret that millions of Baby Boomers are now discovering the hard way: Your Social Security benefits themselves can end up subject to income taxes.

Take a step back and think about that. You pay into the system through dedicated taxes for several decades. The whole purpose is funding a program that will eventually make payments back out to you. Then, when it’s time to finally collect, the government taxes the distributions all over again!

This is absolutely crazy.

Lawmakers love the idea, of course. Why? Because it allows them to effectively reduce benefits being paid to millions of Americans without having to actually characterize it that way. Indeed, I fully expect this to get worse as politicians find ways to further reduce the amount of money our ailing Social Security program hands out. It is ALREADY being done to more and more Americans each and every year. I suspect many new retirees were shocked to find that out as they completed their 2017 tax returns.

Here’s how the current law works… You could owe federal income taxes on as much as 85% of the Social Security benefits you receive. It all depends on how much “provisional income” you earn during retirement. To figure this number out, you add up your adjusted gross income (not including S.S. payments), additional tax-exempt interest you’ll collect, plus half of your S.S. benefits.

If you file a joint return: Your benefits are tax free if your provisional income is less than $32,000.
No more than half your benefits can be taxed if your provisional income is between $32,000 and $44,000.
And if your provisional income exceeds $44,000, it’s almost certain that 85% of your benefits will be taxed.

There are several things to note here:

First, if you file single or head of household, these thresholds go DOWN significantly - i.e. taxation begins at provisional income of $25,000.
Second, in that middle range the actual methodology and exact amounts get tricky but the end result is that you will likely owe a good amount of money back to Uncle Sam.
Third, these thresholds have NOT been getting re-adjusted for inflation!

I can’t stress the last point enough. These numbers were originally established back in 1984. It is now 34 years later and they haven’t been adjusted. And as you know, $32,000 a year isn’t all that much money these days. So what was initially designed to target a small segment of the population now blankets a large swath. The lack of inflation adjustment is the primary reason more and more retirees are getting snagged every year.

Just consider: The Congressional Budget Office said 39%, or 16.9 million, of Social Security beneficiaries had some amount of their benefits taxed back in 2005. More recent numbers from the IRS and other sources now suggest it’s roughly two-thirds of all Social Security beneficiaries!

I’m going to tell you flat out that I don’t think this is right. I believe the taxation of Social Security benefits punishes people who have planned adequately for retirement - along with large groups of regular Americans who happen to have pensions or other well-deserved retirement income sources - and only raises more questions about the overall fairness of the current Social Security system.

But again, based on the rapidly deteriorating condition of our nation’s retirement system, I think this is just the beginning of a larger trend. Not only will lawmakers allow inflation to bring more Social Security benefits into the taxation loop but it is also quite likely that they will eventually expand the concept or the percentages to further reduce the total amount of money being paid out.

The bottom line here is that whether you are self-employed or work as an employee, you’re going to pay (directly or indirectly) the full tab into Social Security and Medicare. It’s important to keep the real number in mind both for compensation purposes and to have a better handle on just how much these programs are actually costing us all.

So is there anything you can do to avoid having your Social Security benefits taxed? You may be able to shift around certain retirement distributions and use certain types of investment accounts to control how much provisional income you receive in any given year. I would recommend working with a tax advisor or financial planner to figure out what’s right for your particular situation, but here are a few starting points:

#1. Consider a Roth IRA over a traditional IRA since the former’s distributions are not taxable income.
#2. Take distributions from your retirement accounts in such a way that they only push you into the taxable range every other year.
#3. And be careful how and when you sell stocks, real estate, or other major assets."

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