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Federal Tax Law On Social Security

Social Security is a federal program, and as such, all of its taxes are received by and its outlays dispensed from the U.S. Treasury.

According to Federal Tax Law on Social Security the Social Security and other entitlement programs will then be dependent on the federal government to cover their costs at the same time that the government must pay for its many other functions.

Regardless of how any federal program is financed and accounted for and whether it is presented as on or off budget a full understanding of the government's looming fiscal strains and the potential economic impact of its fiscal condition requires that all government functions be considered together. It is the federal government's total claims on the nation's resources that affect the economy not the individual components that make up those claims.

Federal Tax Law on Social Security encourages you to save for retirement by providing tax advantages to those who save pretax dollars. With most other common savings and investment vehicles, your investment is made after paying taxes, and the possible growth potential of your savings is limited because you must pay current income taxes on your earnings.

Tax-deferred retirement savings, such as qualifying company retirement savings plans, IRS Code Section 403 (b) tax-sheltered annuities, or individual retirement accounts (IRAs), postpone taxes on money earned until you receive it, presumably during retirement.

The Federal Tax Law on Social Security is very generous to employer-provided Social Security Insurance, the only tax relief for individually purchased, individually owned insurance is that premiums are deductible to the extent they exceed 7.5 percent of income. (There is an exception for the self-employed - in the next few years they will get a 100 percent deduction of premiums, but no relief from the payroll tax.) This bias in the tax system is a major reason why more than 90 percent of people with private insurance get it through an employer.

Most of the time, the income taxes discussed that are federal rather than state, for two straight-forward reasons. First, Federal Tax Law on Social Security is vastly more comprehensive and subtle than any state’s tax law, so there is more to talk about. Second, most states use the income figure from your federal return (either taxable income or adjusted gross income) as the starting point in their tax calculation. There are plus and minus adjustments to reflect the state’s particular income and deduction rules, but generally your federal income is the most important factor in determining your state tax.
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