Month: November 2021

The Social Security Administration recently announced that COLA (Cost-of-Living Adjustment) will increase by 5.9% in January 2022. This is the largest increase since July 1982. But what is COLA?

Social Security Benefits
Receive 5.9% Cost of Living Adjustment

COLA is an adjustment to the Social Security and Supplemental Security Income (SSI) benefits that are being paid out to approximately 70 million Americans. We will take a closer look at COLA and its significance, and what effect does the change in COLA have on you as a taxpayer.

In 1972 the law was changed to provide for automatic annual cost-of-living allowances based on the annual increase in consumer prices. Beneficiaries of the SSI had to wait on the action from Congress to receive a benefit increase before the 1972 legislation. This change simplifies the adjustment and does not allow the effect of inflation to take hold on the benefit payments.

The automatic annual cost-of-living allowance is based on the percentage increase in the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). If there is no increase in the CPI-W, there can be no COLA increases.

The significance of COLA is that it ensures that the purchasing power of the SSI benefits is not being reduced by inflation. While a 5.9% benefit increase looks good on paper, it is important to note that it is not additional income. It is the minimum amount needed to maintain the purchasing power the beneficiaries had all along.

The beneficiaries also have to account for Medicare Part B premiums and taxes that reduce the value of the COLA increase for many. The Medicare Part B premiums increase on a yearly basis that seniors pay for physician and outpatient services. The premium paid depends largely on the beneficiary’s income. The adjustment for inflation is consequently being eroded by the increase in Medicare premiums and cannot keep up fast enough with the inflation. If you are on Medicare, you will not get your 2022 Social Security benefit amount until the official Medicare premiums are announced. You can check in December if you have an online social security account.

The social security tax funds the social security program in the United States. Working taxpayers are funding the benefits of the existing beneficiaries. Ideally, those working taxpayers will eventually retire and qualify for SSI benefits that are funded by current workers.
The tax has two parts. The first is the payroll tax (FICA) and the self-employment tax (SECA). The Medicare tax makes up the second part. Payroll taxes are based on an employee’s net wages, salaries and tips that are typically withheld by an employer and forwarded to the government. In 2022, the social security tax is 6.2% for the employer and 6.2% for the employee.

Self-employed taxpayers pay Social Security taxes as part of the quarterly estimated taxes to the Internal Revenue Service (IRS). These taxpayers pay the full 12.4% since they are considered both the employee and employer. Fortunately, the IRS allows self-employed individuals to deduct the employer portion of self-employment taxes from their taxable income.

The social security tax rate rarely changes – employees have been paying 6.2% since 1990. However, unlike the tax rate, the Social Security tax limit is adjusted annually due to COLA to keep Social Security benefits on track with current inflation. The maximum amount of earnings subject to Social Security Tax will rise 2.9% from $142,800 in 2021 to $147,000 in 2022. Any income earned beyond the wage cap is not subject to a 6.2% social security payroll tax. However, there is no wage base limit for Medicare tax. The cost of adjusting COLA falls mainly on about 12 million high-earning workers.

If you have any questions regarding the Social Security benefits or taxes related to it, please contact RVG & Company to discuss this issue at 954.233.1767.

Taxpayers who elected to itemize their deductions may have reduced their federal income tax liability by claiming a full deduction, also known as the “SALT deduction,” for certain State and Local Taxes (SALT) paid before the Tax Cuts and Jobs Act (“TCJA”) was enacted in 2017. The taxes paid to a state were subsidized by the federal government and reduced the taxpayers’ cost of living in a state.

Under the TCJA, the previously unlimited SALT deduction was limited to $10,000, this is also known as the “SALT Cap”. The TCJA SALT Cap applies for tax years 2018 through 2025. The reason for this is that it was considered to be unfair to the federal government to subsidize bad fiscal policy in high-tax states, such as New York and California.

We will explore the impact the SALT cap has had on taxpayers and the states, the workarounds the states have made to lighten the load on taxpayers, and explore possible future changes to the SALT deduction.

The changes enacted in the TCJA have considerably affected the SALT deduction in the last several years. The SALT deduction reduced the cost of state and local government taxes to taxpayers because a slice of the taxes deducted is paid for by the federal government. The SALT cap increases the cost to the taxpayer and state and local taxes by decreasing the deduction’s value.

State and local tax payments and liabilities tend to increase with a taxpayer’s income. In addition, sales and property tax payments increase as a result of higher income and increased consumption. Thus, the SALT cap mostly affects taxpayers with higher income as this group would report more state and local taxes.

The $10,000 cap on the SALT deduction has produced a migration from high tax states to low/zero-tax states. Florida and Texas, two states with zero income taxes, gained the largest number of tax-filers from 2016-2017, amounting to 56,000 and 35,000 tax-filers, respectively. New York, one of the highest income tax states in the US, lost the largest number of taxpayers between tax years 2016 and 2017, amounting to 77,000 tax-filers. The loss of high-income taxpayers causes deficiencies in state budgets and incentivizes state governments to develop state tax legislation to retain their residents.

The SALT cap does not limit the deductibility of state taxes imposed on business entities. As a result, several states have proposed or passed legislation on Pass-through Entities (“PTEs”) designed to allow the PTEs to deduct state income taxes that the individual owners would have otherwise been unable to deduct under the SALT cap. This in known as a SALT Cap Workaround. The work-around legislation varies from state to state, but they share a similar goal of reducing the SALT cap’s effect on taxpayers without reducing their state or local tax obligations. As of October 27th, 2021, 19 states have enacted a form of a SALT Cap workaround to provide relief to state and local taxpayers within their states.

On November 9th, 2020, The IRS released Notice 2020-75 that effectively permits PTEs to fully deduct entity-level state and local income taxes that would otherwise have been paid by the owners of a PTE. This adds a layer of reassurance to states and individuals on working around the SALT cap.

Under recently proposed tax legislation, the House, currently held by the Democrats, has proposed to raise the annual SALT deduction cap to $72,500 from $10,000 through 2031. It was also proposed that the higher deduction cap would apply retroactively beginning in 2021. The proposed bill will eventually move to the Senate where the SALT deduction cap may be adjusted or removed as the proposal has received criticism from top Senate Democrats.

Despite the TCJA reducing the SALT cap deduction to $10,000 on federal income taxes, numerous states have found a workaround to the SALT cap deduction to maintain their budgets and retain high-income taxpayers within their states. Additionally, the proposed tax bill by the House provides that the SALT cap ceiling may be higher in the future.

If you have any questions regarding the SALT Cap Deductions or taxes related to it, please contact RVG & Company, today! (954) 233-1767.