A recent Tax Court case, McCarthy v. Commissioner, T.C. Memo 2015-50, is an illustration of how it is easy to be confused about retirement benefits and taxation of some of the Social Security benefits.
The taxpayers are a married couple. She was a retired nurse with state retirement benefits. He worked for wages that were subject to Social Security and Medicare taxes. He got Social Security benefits of $19,132 from his earnings history. They were both age 82 and lived in Ohio. They timely filed their 2011 federal income tax return.
She received $27,413 of retirement benefits, but only reported $9,234 of that as taxable income. They reported total Social Security benefits of $37,600 with none of it as taxable income. They treated a portion of the retirement pay as Social Security benefits.
The tax law requires some of the Social Security benefits to add into taxable income, depending on total income and the adjustments required on the “Social Security tax worksheet.” If modified adjusted gross Income for a couple is large enough, then some of the Social Security benefits are taxable.
The McCarthys argued that the law was not fair. They wanted the reduction of her Social Security benefits just because she had a state retirement pension.
The Tax Court explained that Congress made the tax laws and any remedy or correction had to be done by Congress. The court suggested that almost no one in Congress really understands the situation and it seems Congress is not interested in making any corrections or changes to the income tax law in this area.
The Social Security laws are complicated and the income tax treatment of Social Security benefits does increase the income tax paid if there is enough other income.
Maybe this is just another illustration of how important it is to write to the members of Congress and ask for their action to eliminate unfair tax provisions.
The Social Security fund is not in big trouble like the Disability Insurance Fund is. If the Social Security normal retirement age was increased a bit (again) and the Social Security taxes on wages were increased a little, it seems the fund will be OK for decades.
Social Security benefits are a big item to many retirees. When they have enough other income, some of the benefits are treated as taxable income (causing more income tax to be paid). The reduction of benefits for government retirees is an area that many feel should be changed.
Did you hear? “Anything that happens enough times to irritate you will happen at least one more time,” said Tom Parkins.
John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.