Could ROTH IRAs have an Impact on Future Taxable Income?
By Edward Brown
Back in the early 1980s, when I was preparing tax returns, I made a prediction that everyone I shared with thought I was out of my mind; I predicted that the government was going to tax Social Security in the future. The objection from my naysayers was that the income was already taxed, so it would not be fair to tax it again.
My reasoning was that the government is always looking for ways to raise revenue, and it tries to do it in very sly ways. Unfortunately, I was right. First, Congress decided to have as much as half of a recipient’ s Social Security be subjected to taxation; then, it was decided that up to 85 % of Social Security could be subjected to tax, depending on the taxpayer’ s adjusted gross income. This is not the first time Congress has done this“ end run” on taxing certain income. In the“ old days”, prior to the 1980s, the Alternative Minimum Tax was designed to only tax those wealthy taxpayers who could afford tax shelters and other tax avoidance schemes. However, years later, many people were subjected to this, somewhat hidden, tax as they had no idea they were being thrust into it. Certain expenses such as state income tax deductions were added back into income and taxpayers found themselves paying more when they filed their income tax return than they expected. Worse, it was difficult to avoid this tax that was supposed to be imposed on“ the wealthy” but was now subjecting middleclass taxpayers.
Next, Congress decided that Municipal Bonds could potentially cause a taxpayer to pay higher taxes [ on their Social Security ] than they normally would by owning Municipal Bonds, depending on adjusted gross income. So, although the owner of Municipal Bonds does not pay tax on the interest earned on those bonds, the taxpayer may end up paying more taxes on other income because of the Municipal Bond income.
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