Do we all pay double tax here in US?

punamytsikeJuly 3, 2004

I just checked my W-2 and tax returns and it appears that SS and medicare tax is not deducted from gross pay before the income tax is calculated. Am I correct? Are you/me all really paying tax on SS and medicare tax amount of our income?

What's your understanding.


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The employee-paid Social Security and Medicare tax is not deductible. (There is, however, an adjustment via the income tax for overpayments of SS when a person has more than one job at a time.) This is not "double taxation," because a portion of Social Security benefits is received tax-free. Generally people receive significantly more in tax free benefits than they paid in. Medicare eligibility is another valueable benefit in that equasion. The exempt amount was set in the 1980s based on an average lifetime contribution rate and life expectancies at that time. The average lifetime contribution rate is higher now but offsetting that life expectancies are longer. Congress should take a look at the assumptions, and should consider adjusting the income thresholds (set in the early 1990's) above which some Social Security benefits are taxable, in light of higher contribution percentages for today's (and tomorrow's) retirees and for the effect of inflation on the income thresholds. Given the burgeoning federal deficits that probably won't happen, or if it does it will be in a package with undesirable changes to the Social Security system.

    Bookmark   July 3, 2004 at 4:24PM
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ManyHosta, thanks for a quick replay. So I was correct and it is of a concern to me. We are told to contribute to all kinds of before tax vechicles (IRA, 401K and so on) to make sure that we are covered during our retirement. At the same time SS that most people relay on in their time of need is collected on after tax income. Lots of people will find that they will not be able to live on SS alone and will need to work long into their retirement years, efectivly not seeing any non taxed SS benefits. This does acutally seem even more like double taxation to me.

    Bookmark   July 3, 2004 at 4:36PM
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double taxation is living in Washington state where we pay a high sales tax and no state income tax. We cannot deduct sales tax on our federal tax return although folks in other states get to deduct the state income tax paid. That is double taxation!

    Bookmark   July 3, 2004 at 9:19PM
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SS was never meant to be the only savings one did for their retirement. It was seen as a bare minimum that would keep our elders from starving. Those who have to live on SS alone can barely get by.

Income tax is tax on income. What you spend that income on has no relation to the fact that income is taxed. We are required to give a certain amount of income to the SS and Medicare funds because we have a social contract - the working generations will give to these funds in order to support the retired workers. There was never meant to be any kind of "tit-for-tat" accounting of who put what in and who got what out except when it comes to figuring a retiree's monthly benefit. That is figured based on income earned in the last few years of working, if that worker has worked and paid taxes for at least 40 quarters (quarter years, that is). If someone stops working before they have achieved 40 quarters of income, (or works "under the table" and does not pay SS tax for at least 40 quarters)they do not qualify for SS benefits at retirement age.

SS is also there to insure that disabled workers have income. Once you have your 40 quarters of paying SS tax in, you qualify to receive monthly income if you are unable to work. If you are disabled before you get 40 quarters in, you qualify for monthly disability income if you have the number of quarters of work specified for your age range.

The idea of "before tax" savings for retirement is relatively new. I am 45 and I remember when the 401k and 403b and whatever else these programs are called began. Before that time, every bit of saving that you did for whatever reason was "after tax". Every bit of spending you did was "after tax." Income tax is tax on income. The idea of the pre-tax retirement accounts was that you could DEFER paying taxes on that income. You will pay the income tax on your 401k when you draw the money in that account out. Ideally, your income level and the tax rate at the time of withdrawal are lower than they were when you put the money in, so you pay fewer dollars in tax. That is not guaranteed, however. Taxes could be higher then and you could pay more than you would have if you had not put the money away "pre-tax".

Once we started fooling around with these retirement accounts and pre-tax savings acounts for childcare, health care, elder care, people started to believe that they were entitled to have the right to spend their money on essentials "pre-tax". Is there something about these things that makes them special? Only that the government wanted to encourage us to do certain things (like spend our own money on healthcare so we don't start demanding universal health care, or providing good care for children so that both parents can work) so they use the tax law to promote our doing these things. Allowing people to spend money "pre-tax" is just a way for the government to manipulate our spending in a way that politicians find useful. Sometimes the usefulness has more to do with re-election issues than well though-out social policy. JMHO, of course.

There are many different levels of government, all of which need money in order to provide services. So yes, all income is double-taxed, triple-taxed, or more. If you want services, regulation to ensure that your doctors went to med school, there is really beef in the can of stew you buy, that the builder who built the high rise in which you work did not use substandard building practices, that there are roads, utilities, schools, and whatever else is needed to organize people with different ideas of right and wrong - then you pay taxes to get it. Anarchy does not work well unless there are large spaces between individuals or the human heart becomes generous, kind, and caring. As long as there are people who put their own needs and wants first, there will be the need to regulate the interactions between them.

    Bookmark   July 4, 2004 at 12:54PM
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I understand that SS is bear minimum, I also understand that we have to pay income tax on income. SS tax and madicare tax is not income for me, nor have I signed any contract or do I have joice to either pay or not to pay SS and medicare tax. Taxing tax is called double taxations and if it took me this long to figure out that this is what is happening with the SS tax then I am sure that there are lots of people out there that do not know that either. You can deduct your state income tax, you can deduct your property tax before income tax is calculated. Now that I have finally realized that SS and medicare tax we pay is income taxed as well, I will contuct my representatives in Washington to let them know that I find this unfare and not right. Anyone else feeling the same way, should do the same.
I am not against paying my fare share but that exactly what I want "fare share" not over paying.

    Bookmark   July 4, 2004 at 4:26PM
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So if everyone pays taxes on money that is used to pay SS and Medicare taxes, how is this not fair? If everyone pays taxes on that money, how do you define "overpaying?"

I would be worrying more about the very rich who can use the tax law to pay less in taxes, if I were as concerned as you are. What do you think about the deductibility of SUVs (not compact cars, not small trucks - the deduction only works with vehicles the size of an SUV) for small business? Is that fair? Also, where is it written that tax law is fair?

The social contract is the agreement to abide by the law of the land that you agree to simply by being a citizen. You can influence these laws by communicating with your representatives in government - so you do have the right idea there.

    Bookmark   July 4, 2004 at 11:42PM
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The fairness or wrongness comes from the fact that the law requires eveyone to pay INCOME TAX on Social Security TAX and medicare TAX. The law does not require to pay income tax on state income tax or realestate tax for example. This different treatment of taxes is wrong and unfair. Beside how can you call SS tax and medicare tax income? These are taxes not income and this treatmnet actually hurts low income people much more than higher income people as SS tax and medicare tax is deducted from the first dollar of income that you earned.
Also businesses are allowed to deduct those taxes as business expense and as you mentioned earleir the SS benefits are not meant to be ""tit-for-tat" accounting" so why do businesses have to be less patriotic in helping to finance the soscial services needs than individuals.

    Bookmark   July 5, 2004 at 7:53AM
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Ah ha! I think I see where our misunderstanding lies. I see anything that is in the GROSS INCOME part of my paycheck as income. That is all taxed, except for what I may decide to put into a 401k, IRA, etc or into a tax-deferred saving plan for medical savings accounts or childcare accounts. So the gross income amount has my tax-deferred retirement savings and my tax-deferred health or childcare subtracted out. Then I pay income tax on what is left. Then they take out Social Security tax, and Medicare tax.

You want the Social Security tax and the Medicare tax taken out, then the remaining income taxed. I, on the other hand, contend that the money you are using to pay your SS and Medicare tax IS income and is taxed like income. You disagree and think it should be treated like the tax-deferred savings for retirement, health care, and childcare. I still contend that these tax-deferred savings are a new development and have nothing to do with what money you pay your SS and Medicare tax on. Before about 1980, they never existed! The income tax was figured on your income, then you used part of that income to pay SS tax, Medicare tax, state income tax, sales tax, user fees, whatever.

Actually, self-employed folks do not have the convenience of having SS and Medicare taxes taken out of our checks and must pay them ourselves. Employed folks get their employers to pay half of SS tax. I don't, I pay the whole amount of SS and Medicare taxes when I pay my taxes each year. I do get to deduct half of the SS and Medicare tax that I pay out of my income (so technically I do not have to pay income tax on the half of it that I pay for myself that others who have employers have paid for them. I pay $x extra in tax because I am self employed, and get all of 20% of that back by not paying taxes on it - but I am still out the other 80% that I had to pay - that employed folks had their employers pay for them.)

Anyhow, we are paying income tax on our income, then using that income nanoseconds later to pay SS and Medicare taxes. And later to pay State and local taxes. And buy whatever else we buy. We do use our taxed income to pay for state income tax and to pay for real estate taxes. If you do the long form (most working-class folks do not earn enough to do so), you then can deduct these taxes from your income on Schedule A. Again, you are getting back maybe 15 - 30% of that money you paid in these taxes by deducting them from your income. Sales tax, building permits, licensing fees, all kinds of taxes do not get this special deductibility. So we are constantly paying taxes with money that we already paid income tax on. In a few special circumstances we may deduct these taxes from our income and thereby reclaim a portion of that money, but by no means are all taxes given this special treatment.

Again, since fairness lies in the eye of the beholder, there is no way to construct a tax system that all would find fair. You don't like to pay taxes with money that was already taxed for income tax. Okay, I guess that this is as good a gripe as anyone has. As Albert Ellis, the great psychiatrist says, "Who said life is fair?"

    Bookmark   July 5, 2004 at 11:38PM
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I agree with everything Nancy_in_Mich says. One of the biggest problems with the Social Security is that it covers every dollar of earnings up to $87,900 (in 2004), and nothing above that. Making it deductible would merely make it more regressive.

The Earned Income Tax Credit is the feature of the federal (and some states') tax code(s) designed to partly offsets the regressiveness of the FICA taxes on low- and moderate-income working people with children living at home.

    Bookmark   July 6, 2004 at 10:16AM
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Punamytsike, if you're looking for fair, you'd better look somewhere besides the U.S. tax code.

The bottom line is that making SS and Medicare taxes deductible against federal income tax would just be a shell game of shifting the tax burden around some. If you pay a lot of SS and Medicare taxes (meaning you are at or near the top of the income ceiling on which those taxes are collected), you'd probably be for it, whereas if you don't even make enough money to file a long form 1040 and take anything other than the standard deduction, you'd probably be against it.

As far as whether they're "regressive" now, you could argue tha the first so many dollars that you now earn on which no federal taxes are collected makes up for that.

While it'd never be politically practical, it would probably make more sense to lump all the various federal income taxes into one tax and raise the tax rates enough to cause the government's total tax income to be the same. They spend all that money that's supposedly "earmarked" for SS and Medicare on whatever they want anyway. Then all the hand-wringing about the Social Security system could stop, and we'd all just grow up and realize that one way or another, these things have to be done and someone has to pay for them.

Or we could just keep doing what we're doing now, and raise the tax on cigarettes another $1 a pack, and install a few thousand slot machines, in a never-ending effort to try to get "someone else" to pay for the programs we want and depend on.

    Bookmark   July 6, 2004 at 4:07PM
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You're also neglecting the fact that every dollar of the employee's Fica tax is matched by the employer. The employer's matching contribution is not considered income to the employee and is not subject to income tax. So actually, half of an employee's total FICA contributions are from before-tax dollars.

Most retirees get much more from SS in benfits than they have paid in, except for those who die at a relatively early age. They're the ones who get screwd, but SS is only partially a pension scheme. It's also partially as way to redistribute money to lower-income people and the disabled.

    Bookmark   July 7, 2004 at 11:58AM
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Aghr...... I am not neglecting anything. I know that employers pay half the FICA tax and self-employed pay the whole thing and can deduct half of it before paying income tax. What I still contend is that tax whether paid by person or it's employer is not income. It becomes income when you receive the SS benefits and then is the time you should be paying the income tax not when you are contributing to the community pot.

    Bookmark   July 7, 2004 at 12:14PM
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Of course tax is not income. But what you see on the line on your check that says FICA is a tax that is assessed based on the amount of your income and immediately collected. They are not taxing the FICA, they are taxing the number on the GROSS income line, deducting your tax payment immediately, and sending you the rest to do with as you like. That is your NET income. You are not paying income tax on a tax, you are paying income tax and medicare tax and social security tax on your GROSS income. The government does you the "favor" of collecting it so that you do not have to remember to save it and send it in quarterly.

    Bookmark   July 7, 2004 at 5:46PM
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Sounds like you want SS to resemble conventional IRAs, 401Ks, Keoghs, etc. Actually, the system is more akin to a Roth IRA (which is not deductable, but also not taxed at wihdrawal), although, like I said, only half the SS contributions actually are counted as income.

Most people consider IRAs and their ilk to be tax breaks. If we simply invest our retirement dollars outside of an IRA-type plan, then the dollars we invest are treated as income and subject to income tax. In other words, we use after-tax dollars. Yet, when we retire and cash in these investments, we will be taxed on the income they earn for us. Is this double taxaction?

We get a partial tax break with SS because the employer's portion isn't treated as income. We also get at least a partial tax break in retirement because the benefits up to a certain amount aren't comsidered income and aren't taxed. That's not bad, all things considered.

The present FICA tax is very regressive, as other posters have pointed out. That's unfortunate. But we should remember that SS does have two aspects -- one is that it's a wealth redistribution scheme (lower wage earners get a better return on their contributions than the middle and upper brackets) and the other is that its a umiversal pension scxheme that gives benefits to everyone, even the wealthy. I doubt if Roosevelt would have been able to get it by Congress back in 1938 if it had been funded by a pure income tax increase because the middle and upper classes would have regarded it as welfare. The fact that it's regarded as a universal pension scheme that has been able to pay nice retirement benefits to both the middle class and decent benefits to the poor is what has made it such a huge political success. Tinkering too much either way would be likely to upset the delicate political balance and bring down the system, IMHO.

    Bookmark   July 7, 2004 at 6:00PM
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Just a note that these witholdings are not just for retirement. They can benefit you or your surviving spouse and children (if you die) in many meaningful ways.

My husband's kidneys failed when he was 39. Because he had contributed through the years, he was eligible for Medicare Plan B for his dialysis and other related treatment.

Another friend's sister was married to a preacher. She never worked, and never contributed into a fund. Her kidneys failed in her 30's also. But she was not eligible for dialysis or other renal failure benefits. Her family raised money to pay for all her necessary treatment until she got a transplant, which they also assisted with payment for.

The benefits received from the lifetime contributions are tax free. True they need supplementation if you retire. But if you die your children and spouse will receive good assistance. In our case, even with regular insurance, much of the expense of surviving kidney failure was not covered. We were glad for the support.

You should receive a report every year or so that outlines your lifetime built-up contributions and the types of benefits you or your survivors can receive.

    Bookmark   July 9, 2004 at 9:48AM
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Actually, Medicare and Social Security are insurances and you are paying premiums to purchase the coverage (even though involuntary) and not taxes.

    Bookmark   July 14, 2004 at 11:35AM
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Sorry, I just read my SS guide and they do call it a "TAX", but I still view it as a premium payment. Must be the actuary in me.

    Bookmark   July 14, 2004 at 11:38AM
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