Social Security Woes

Yes, it’s a subject that just refuses to go away, isn’t it?    And it gets worse when the Social Security Administration Office of the Chief Actuary pontificates – as he recently did in his annual report to Congress.

And that particular pooh bah is projecting that the Social Security wage base will increase by at least $3,500 in 2012 – up from the $106,800 level at which the wage base has languished since 2009.

Recall that the Federal Insurance Contributions Act (FICA) tax rate consists of two parts – one for Old Age, Survivors and Disability Insurance (OASDI), generally known as the Social Security tax, and the other part for hospital insurance (HI), generally referred to as the Medicare tax.  The combination of these two tax rates was a total of 7.65% on employers and employees (total of 15.3%) until this year, when the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (phew!) actually reduced the employee portion by two percentage points on the first $106,800 of salaries for 2011 – one of Obama’s hoped for job stimuli.

But get ready for that 2% tax holiday to evaporate, and watch that wage base start soaring – the Chief Actuary’s numbers suggest the $106,800 will reach over $125,000 by 2015 (a modest 17% increase within just a few years) and a staggering $153,000 and change by 2020!

And if that’s not bad enough, the Actuary points to the Baby Boomers as a key reason why the Social Security “trust funds” (a bad euphemism if there ever was one) will be exhausted in 2036.  That’s just a few short decades away, folks.  And perish the thought that just a year ago, the Actuary’s projection was that the dough would last until 2037.

And from our “where do you draw the line” department comes an interesting decision of the Tax Court relative to the manner in which pro athletes’ “endorsement” income is taxed.

Any of you who watch professional golf have noticed that the players have started looking more and more like “Indy cars,” with sponsors names plastered on almost every square inch of their clothing and equipment.  So here comes noted South African player Retief Goosen who somehow concluded, in filing his 2002 and 2003 U.S. nonresident income tax returns that 50% of the payments received from some of his sponsors were for his personal services (due to the sponsors’ requirement that their products be worn or used by the Goose during golf tournaments) and the other 50% constituted royalty income.  Of course, the Revenooers thought all 100% should be treated as personal service income, but the Tax Court stuck with the 50/50 approach, noting that in so doing “precision in making such an allocation is unattainable.”

Really.

CONSULT YOUR TAX ADVISOR – This article contains general information about various tax matters.  You should consult your CPA regarding the implications to your own particular situation.

Jeff Quinn, the author of this article, is a shareholder in Ashley Quinn, CPAs and Consultants, Ltd., with offices in Incline Village and Reno.  He can be reached at 831-7288, welcomes comments at below, at jquinn@ashleyquinncpas.com, and invites readers to consider his other commentary at http://blog.nolo.com/taxes/.