Selected Research & Analysis: Income Taxes
See also related Extramural Projects.
Saving for retirement has traditionally been compared to a three-legged stool supported by Social Security benefits, workplace pensions, and household savings. As the prevalence of defined benefit pensions has diminished in recent decades, the importance of household savings has grown. To enable and encourage saving among lower-income Americans, policymakers have established several types of tax incentives. The Earned Income Tax Credit (EITC) provides an immediate reduction in income tax liability (or a larger refund) for eligible households. Additionally, certain types of retirement saving accounts and defined contribution saving plans lower current tax liability by deferring taxation of the amounts contributed until the funds are withdrawn in retirement. Using data from the Understanding America Study, this article compares the retirement-related financial behavior and preparedness of EITC-eligible and ineligible households and examines whether EITC eligibility affects the use of tax-advantaged retirement saving plans.
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income. Because those income thresholds have remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time. A Social Security Administration microsimulation model projects that an annual average of about 56 percent of beneficiary families will owe federal income tax on part of their benefit income from 2015 through 2050. The median percentage of benefit income owed as income tax by beneficiary families will rise from 1 percent to 5 percent over that period. If Congress does not adjust income tax brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.
Taxation of Social Security Benefits Under the New Income Tax Provisions: Distributional Estimates for 1994
This paper reports on estimates of federal income tax and Social Security tax liabilities of family units in 1972 and summarizes the methods used to make the estimates. Distributions of income both before and after subtracting those liabilities are shown. Several microdata files were combined using both "exact" and "statistical" matching of individual observations in the process of making these estimates.