Phasing out on taxing Social Security

Lanny Lundquist of Woodbury is recently retired, and he was surprised to learn that he would be paying income tax on his Social Security benefit, as much as $619. “It doesn’t break the bank, but it does have an impact on our income,” he told the House Taxes Committee March 8.

He supports HF410, a bill sponsored by Rep. Kathy Lohmer (R-Lake Elmo), which would phase-in over 10 years an exemption of Social Security benefits from state individual income tax starting with 10 percent in 2011 and increasing 10 percent per year. The bill was held over for possible omnibus bill inclusion. It has no Senate companion.

“Minnesota is one of only seven states that taxes Social Security benefits. We are essentially taxing our senior citizens twice on the same money,” Lohmer said.

Under current law, up to 85 percent of Social Security benefits are subject to federal and state income tax depending on income. For instance, according to nonpartisan House Research staff, a married couple that receives the average Social Security benefit of $22,800 annually and has a total income from all sources of less than $43,400 is not taxed on the benefit. Couples with average benefits and a total income over $71,141 must include 85 percent of the Social Security as taxable income.

Rep. Tom Rukavina (DFL-Virginia) said the bill would provide a benefit only to higher-income retirees.

The way this bill is drafted, people like Lundquist would get some help “because they are lower- to middle-income, but people making $150,000 to $200,000 a year are the ones who will get the rest of the benefit … and the younger people are going to have to pay for it,” he said. “I am a Robin Hood kind of guy, and it depends upon who you want to cheer for.”

Lohmer’s bill would affect approximately 296,000 taxpayers in tax year 2011.

The Department of Revenue projects a $26.6 million cost to the General Fund in fiscal year 2012 and increasing annually to $1.36 billion in fiscal year 2015.