Hurts Economy, Unfair to Employees: Why Pay Federal Income Tax on Social Security, Disability, Unemployment Insurance Benefits?

Social Security, Unemployment, and Disability Insurances' benefits should not be taxable as income ... period.



Yet:

(1) Social Security insurance benefits are taxable as regular income.

(2) Unemployment insurance benefits are taxable as regular income.

(3) Disability insurance benefits from a personally sponsored or employer sponsored plan are taxable on the portion of premiums paid by your employer. If your employer sponsored disability plan premiums are paid through an employer sponsored cafeteria-style benefits program then all of the premiums are considered paid by the employer.

Ordinary income is subject to Social Security payroll taxes throughout your life, at any age, even if you continue to work while collecting Social Security insurance benefits.

Yet,

(1) Income over $113,700 per year -- any kind of income -- is not subject to Social Security payroll tax. This is referred to as the Social Security Income Ceiling.

(2) Income through qualified capital gains (that which is net profits and direct dividends from equity you own for more than 1 year) is not subject to Social Security payroll tax.

(3) Federal Unemployment Insurance premiums are capped to 6.0% on the first $7,000 in annual income per employee (fully paid by employers only) and exempt from capital gains income; but if not capped then could be an estimated .38% which would save employers an estimated $154 per employee.

(3) Medicare payroll tax (of 2.9%) has no Income Ceiling. Additionally, starting in 2013, ordinary income above $200,000/$250,000 will pay an additional Medicare payroll tax of 0.9%.

(4) Medicare payroll tax was not applied to qualified Capital Gains income until now in 2013 when a so-called Medicare Surtax of 3.8% of the lesser of Adjusted Modified Gross Income above $200,000 (joint) or Net Investment Income.




Medicare tax on income has no income ceiling, so why does Social Security tax?

Capital Gains is no longer exempt from Medicare tax, so why is Social Security tax?

Substantially larger percentages of GNP has accrued to those earning more than the Social Security Income Ceiling and in the form of Capital Gains during the past 20-30 years, and this income is not subject to Social Security tax. Therefore this must be diminishing the Social Security Trust Fund and a leading cause of the currently debated squeeze.

And  your thoughts?

By Steven J. Reichenstein