Does $60,000 or $70,000 a year strike you as a Fat Cat income?

Probably not.

While millions of Americans would dearly love to earn that much, $5,000 or $6,000 a month isn't the sort of income that keeps Town and Country, the Robb Report, and Vogue stuffed with advertisements for luxury goods.

So let's ask another question.

Do you think a family at that income should pay taxes at a higher rate than a family with two, three, or four times the income?

Well, this is exactly what happens when you retire and start to collect Social Security benefits, thanks ever so much to our friends in Congress. First they made up to 50 percent of all benefits taxable, then they added a step that made up to 85 percent of all benefits taxable. While it was talked about as a tax on high-income people, the law is written so that it hits middle income retirees just as they are starting to get some breathing room. This happens because the tax is based on a formula that adds Social Security benefits to other sources of income.

To demonstrate the perversity of this tax lets imagine Harry and Sally Taxpayer and use TurboTax to calculate their income taxes as their dividend, interest, and pension income rises from $0 a year to $100,000. As long term workers, Harry gets $10,000 in Social Security benefits and Sally gets $12,000, giving them a total of $22,000 a year. This is about what two average income workers would receive. Here is what happens at different income levels (see table at end of column for more detail):

• They have no Federal income taxes to pay until their pension, dividend, and interest income exceeds $14,400, the combined total of their standard exemptions and standard deductions for 1999.

• At $15,000 they owe $92 in income taxes, an amount indicating a marginal tax rate of 15 percent. Each additional dollar of income is taxed at that rate until their non-Social Security income reaches $21,000.

• When their pension, dividend and interest income exceeds $21,000 a portion of their Social Security benefits becomes taxable. Between $21,000 and $22,000, for instance, $500 of Social Security benefits is added to taxable income. In effect, additional investment or pension income is surcharged, so the effective tax rate is 23 percent. A more literal interpretation is that both the normal income and the Social Security income, treated separately, are taxed at 15 percent.

• As their other income reaches $35,000, $7,700 of their Social Security benefits become taxable and the effective tax rate rises to 25 percent. As it rises toward $50,000, up to 85 percent of their Social Security benefits become taxable and their effective tax rate rises to 42 percent. Again, a more literal interpretation is that both normal income and the Social Security income, treated separately, are taxed at 28 percent. What people actually experience, however, is that an additional $1,000 in other income is taxed at premium rates. Don't look for a 42 percent figure in your published tax rates. According to them, the highest tax rate anyone pays is 39.6 percent and that doesn't start until your taxable income exceeds $283,l50.

• After $50,000 of other income Harry and Sally no longer pay taxes on Social Security benefits--- they've paid taxes on 85 percent of them. As a result each new dollar of income over $50,000 is taxed at a lower rate, 28 percent. Their other income can, in fact, double to $100,000 before they will start to pay taxes at a 31 percent rate.

As with all things taxable, there are lots of ways to calculate this. A different total for Social Security benefits would engage the tax at a different level of income from other sources.

The most important fact is that this isn't a tax on Fat Cats, it is a tax on middle income Americans who happen to be retired. In operation it is a kind of gauntlet, a beating all retirees must endure as their non-Social Security income approaches $50,000.

Is it possible to avoid the tax?

Not really. Even tax-free income from municipal bonds is counted in the income testing. The only way to avoid the tax is to keep your realized cash income below the amount that would trigger the tax--- $21,000 in this example. This means not making withdrawals from IRA accounts.

That's not a choice many people would make.

Soaking the Not-So-Rich

Other Income	Total Cash Income	Social Security Taxable	Income Tax	Tax Increase	Marginal Rate
$0	$22,000	$0	$0	na	0
$14,400	$36,400	$0	$0	na	0
$15,000	$37,000	$0	$92	$92	15%
$20,000	$42,000	$0	$844	$752	15%
$21,000	$43,000	$0	$994	$150	15%
$22,000	$44,000	$500	$1,219	$225	23%
$23,000	$45,000	$1,000	$1,444	$225	23%
$24,000	$46,000	$1,500	$1,669	$225	23%
$25,000	$47,000	$2,000	$1,894	$225	23%
$30,000	$52,000	$4,500	$3,019	$1,125	23%
$35,000	$57,000	$7,700	$4,249	$1,230	25%
$40,000	$62,000	$11,950	$5,636	$1,387	28%
$45,000	$67,000	$16,200	$7,515	$1,879	38%
$50,000	$72,000	$18,700	$9,615	$2,100	42%
$55,000	$77,000	$18,700	$11,015	$1,400	28%
$60,000	$82,000	$18,700	$12,415	$1,400	28%
$65,000	$87,000	$18,700	$13,815	$1,400	28%
$70,000	$92,000	$18,700	$15,215	$1,400	28%
$75,000	$97,000	$18,700	$16,615	$1,400	28%
$80,000	$102,000	$18,700	$18,015	$1,400	28%
$85,000	$107,000	$18,700	$19,415	$1,400	28%
$90,000	$112,000	$18,700	$20,815	$1,400	28%
$95,000	$117,000	$18,700	$22,215	$1,400	28%
$100,000	$122,000	$18,700	$23,615	$1,400	28%

Source: Scott Burns, TurboTax 99'