I am retired, and because the IRS says I make too much money in retirement, they tax 85% of my Social Security benefits. (Shame on me for being a responsible saver and investor.) Because they tax my benefits as if it were earned income, (and they are specifically linked to my previously earned income) can I make annual ROTH contributions from those same Social Security benefits? I invest it all in the market now anyway.
It would seem "fair" since I am being double taxed from my previous working "earned income". But, I know few things in life are fair, especially when it comes to government.
They don't tax your Social Security as earned income. It is just taxable income. Sorry, good try though.
Best explanation I read from Hal_AL…….
When you were working, you only paid half of your SS tax. Your employer paid the other half. At first SS benefits were tax free, then congress decided to tax 50% of it. You know, the half your employer paid for. But all those were still getting half that money tax free, so they settled (for now) on taxing 85% of it. Then they ran for re-election on the 15% they "saved" you.
here is the long explanation
1) the 50% taxable income was introduced in 1983 as part of the "bailout" of social security that Congress and Reagon agreed to. it's the same law that moved Full Retirement Age from 65 to 67 that Baby Boomers are now experiencing.
2) in 1993, it was raised to 85% taxable. the broad thinking is that similar to a pension, you contribute after tax money but the monthly payout is a function of that after tax payment AND the interest that has been credited over time. Congress landed on the 85% to reflect what had not been taxed to you previously.
3) originally, it was believed only 10% of the recipients would pay any tax - based on the $25,000 / $32,000 adjustments in the math. However, these numbers have never been adjusted for inflation and I suspect a lot more than 10% of the recipients are subject to their social security payments being taxable income.