High earners could see a significant tax increase under a Democratic proposal to bolster Social Security and Medicare.
A financial advisor can help you respond to potential changes to tax laws and regulations. Find a fiduciary advisor today.
The proposed legislation – called the “Medicare and Social Security Fair Share Act” – would require taxpayers with over $400,000 in income to pay more into Social Security and Medicare. While most workers pay Social Security taxes on all their income, neither earnings above the $160,200 cap nor investment income currently contribute.
How Your Taxes Could Increase
This bill (S.1174), introduced in April by Sen. Sheldon Whitehouse, D-R.I., with the aim to increase the solvency of Social Security and Medicare. To do so, taxpayers with incomes over $400,000 to would contribute more, via:
- Wages, self-employment and investment income would be subject to heftier taxes above $400,000.
- Close a tax loophole that allows pass-through businesses to circumvent Medicare and other taxes.
A Focus on Social Security Longevity
The move comes in response to estimates that the Old-Age & Survivors Insurance (OASI) trust fund that supplies cash for Social Security payments is projected to run out of money as early as 2033. At that point, the Social Security system would only be able to cover 77% of benefits unless Congress allocates additional money for the program.
Besides the move to apply the payroll tax to incomes of more than $400,000, an option promoted by Republican lawmakers and some Republican presidential contenders is to cut Social Security benefits for younger Americans.
The Social Security Administration recently delivered its analysis of the Medicare and Social Security Fair Share Act and concluded that it would extend the OASI trust fund by approximately 75 years.
“The new analysis from the Social Security Administration shows, we can protect this bedrock program for all and improve our broken tax code — a win-win in my book,” Whitehouse said in a statement.
Companion legislation is being introduced in the House by U.S. Rep. Brendan F. Boyle, a Democrat from Pennsylvania who added, “This legislation saves Social Security and Medicare for generations to come.”
A 2020 study from the National Institute on Retirement Security found that 40% of seniors receive only Social Security income for their retirement, with just 7% of retirees drawing income from the traditional “three-legged stool” of Social Security, pensions and personal savings. Whitehouse noted that Medicare covers health care costs for more than 60 million beneficiaries, including 20% of with less than $15,000 in savings.
High earners would have to pay Social Security and Medicare taxes on income that exceeds $400,000 under legislation that’s been proposed in the Senate. The legislation also aims to close a tax loophole that Democrats say allows pass-through businesses to avoid paying Medicare and Social Security taxes.
Tax Strategy Tips
- A financial advisor may be able to help you optimize your tax strategy and save money in the long run. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- While asset allocation is a key tenant of investing, asset location is almost just as important. This strategy aims to make the best use of your various accounts by keeping tax-efficient assets in taxable accounts and placing the assets with the heaviest tax burdens in tax-free and tax-deferred accounts.
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