Another Stealth Tax on Retirees
I started this article without the requisite research and thought the term “stealth tax” was original. Much to my surprise, the term exists.
Wikipedia defines a stealth tax as “a tax levied in such a way that it is largely unnoticed, or not recognized as a tax.”
An Internet search reveals several articles on the subject, including the one below.
I will not replicate the article.
Instead, I will focus on a tax not included in the above article; the tax many retirees pay on their insurance company premiums.
Let me explain.
In 2021, nearly half of all United States workers were covered by a group health plan. Since the late 70s, these employees have received a tax benefit by paying for health care premiums with pre-taxed earnings. This means that the share of the policy’s cost is deducted before federal and state income taxes, effectively reducing taxable income and the amount of federal and state income taxes owed.
Since 2003, the self-employed have been granted a self-employed health insurance deduction on Scheduled 1 of their Form 1040.
Retirees living off a fraction of their pre-retirement income do not receive either of these benefits and, as a result, pay higher taxes.
Consider the following example. The taxable income of an employee who earns $50,000/year and pays $6,500/year in pretax health insurance premiums is $43,500 ($50,000-$6,500), all else equal. The income tax on the $43,500 at 15 percent is $6,525. The tax on the retiree with the same $50,000 in social security, pensions, and other income is $7,500 or $975 more.
Note that all taxpayers who itemize and whose insurance premiums exceed 7.5 percent of taxable income are allowed a partial deduction for premiums above 7.5 percent.
How do I know about this stealth tax?
I experienced it when I took early retirement from a government agency. Not only did the agency discontinue paying its share of insurance company premiums, but I no longer enjoyed the benefit of paying the higher premiums with pretax money.
The solution to this inequity is to grant retirees the 100 percent deduction on Schedule 1 of Form 1040 currently given to the self-employed.
In summary, Congress has codified laws to soften the blow of increasing health costs on employees and the self-employed. Those who least afford the increasing costs, retirees and the aged, have not received the same treatment.
Note From Author
This article is for informational purposes only and should not be considered financial, tax, or legal advice. Consult a financial professional before making any significant financial decisions.
