Do You Pay Tax On Social Security Benefits

Social Security Is Taxed More Favorably Than Private Pensions

The income tax treatment of Social Security benefits is considerably more favorable than that of private defined-benefit pensions, which are otherwise similar to Social Security. Because of the income thresholds and the 50- and 85-percent limits, only about 30 percent of Social Security benefits are currently subject to income taxation. In contrast, defined-benefit pensions are fully taxable except for the typically small portion representing the employees own after-tax contributions.

CBO and the Joint Committee on Taxation estimate that taxing Social Security and Railroad Retirement benefits in exactly the same way as private pensions would raise $411 billion in additional revenues over ten years. Stated another way, the current tax treatment of Social Security provides beneficiaries with a $411 billion tax reduction, relative to the tax treatment that private pensions face.

Income Taxes On Social Security Benefits

Since 1984, the proportion of beneficiary families whose benefits are taxed has risen over time from less than one in 10 to more than half

Because the income thresholds that define taxable benefits are not indexed to prices or wages, the proportion of beneficiaries who pay income tax on their benefits has risen over time.

Projections1 show that an annual average of about 56 percent of beneficiary families will owe federal income tax on their benefits from 2015 through 2050

Among beneficiary families that owe income tax on their benefits, the median percentage of benefits owed as income taxes will increase from about 11 percent in 2015 to 12 percent in 2025 and remain stable through 2050.

These projections assume that Congress will amend the Internal Revenue Code provisions that require tax-bracket adjustments based on price indexing

Such amendments would assure that the proportion of income paid as income tax would remain close to its current level. Otherwise, the future percentage of Social Security benefits owed as income tax will exceed the projections.

Background

Rep Frank Ryan Introduced The 314

Sam Dunklau / WITF

State Rep. Frank Ryan speaks at a meeting of the House State Government committee on Jan 10, 2022.

A state lawmaker has come up with a revised version of a plan he first introduced three years ago that would not only eliminate school property taxes but would make it illegal for a Pennsylvania school district to impose one.

Sam Dunklau / WITF

State Rep. Frank Ryan speaks at a meeting of the House State Government committee on Jan 10, 2022.

Of course, the plan calls for some tax shifting to generate the $16 billion needed to replace the lost property tax revenue for schools. It also includes new taxes on certain retirement income and food and clothing.

Rep. Frank Ryan, R-Lebanon County, on Thursday unveiled his a 314-page House Bill 13 that is the product of five years of work and pulls in the expertise of a bipartisan working group of property tax elimination advocates.

Everybody wants to get rid of property taxes as long as the other person is the one who is going to pay the replacement tax, Ryan said at a Capitol news conference flanked by members of his working group. It is clear that any solution will require sacrifice on the part of all Pennsylvanians.

His plan tries to spread that burden around. It would:

Ryan acknowledges applying the tax on retirement income makes the sales pitch for his plan a tough pill to swallow, but said he believes Pennsylvanians will face that eventuality anyway.

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How To Determine If Social Security Benefits Are Taxable

People whose only source of income is Social Security do not have to pay federal income taxes on their benefits. However, if they receive other sources of income, including tax-exempt interest income, they must add one-half of their annual Social Security benefits to their other income and then compare the result to a threshold set by the IRS. If the total is more than the IRS threshold, some of their Social Security benefits are taxable.

For 2022 the threshold amount is $25,000 for singles and $32,000 for married couples filing jointly. Married couples who live together but file separately have a threshold of $0 and must pay taxes on Social Security benefits regardless of other income earned.

The formula for calculating your combined income includes adding your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. Your other income, which is included in AGI, can come from a part-time job or withdrawals from a 401 plan or traditional individual retirement account .

More specifically, Social Security benefits are taxed as follows:

• Up to 50% of Social Security benefits are taxed on income from $25,001 to $34,000 for individuals or $32,001 to $44,000 for married couples filing jointly.
• Up to 85% of benefits are taxable if the income level is more than $34,000 for individuals or $44,000 for couples.

Know The Earnings Limits

Those hoping to work in retirement need to be especially careful if theyâre planning to claim Social Security benefits early. Even if youâre just working part-time, itâs important to consider how that continuing income will affect your benefits.

The SSA caps how much you are allowed to earn if you start taking your benefits before full retirement age, which is 66 for most baby boomers. For the most recent annual earned income cap, view the current annual contribution limits. For every $2 you earn over the limit, the SSA withholds $1 off the top of your benefits. Once you reach the year that youâll turn full retirement age, the earned income cap goes up, and for every $3 you go over, itâs a $1 withholding during the months until your birthday.

There is some good news, however: Because the penalty is determined by your individual earned income, if you retire early but your spouse doesnât, your spouseâs earned income will not be factored into the earnings limit. Additionally, when you reach your full retirement age, the earnings limit disappears and Social Security will recalculate your benefit amount if you were negatively impacted by the earnings limit.

Keep in mind, if you file your tax return jointly, your spouseâs earnings will be included when calculating your combined income for purposes of determining the taxation of your benefits.â1

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Taxation Of Social Security Disability Backpay

SSDI benefits are often delayed. Therefore, if you qualify, you will likely receive a lump-sum payment for the back payments you are owed. A large lump-sum benefits payment could significantly impact your taxable income for the year in which you receive it.

Fortunately, there is a way to avoid losing a substantial part of your benefits through taxes. Under the current federal tax laws, you are allowed to apply your SSDI benefits owed from a prior year to that years tax returns, lowering your taxable income for the year in which you received the lump-sum payment. For example, if you were owed 18 months of disability payments and received it in one lump sum, you could amend your previous years return to spread the benefits income over your two returns. If you have any questions, contact our Berks County Social Security Disability attorneys.

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States That Tax Social Security Benefits

You may have dreamed of a tax-free retirement, but if you live in one of the states that tax social security, your benefits could take a hit.

Are Social Security benefits taxable? You can bet your bottom dollar they are at least by the federal government, which taxes up to 85% of your benefits, depending on your income. But do states tax Social Security? Unfortunately, a dozen states can tack on additional taxes of their own.

States have different ways of taxing Social Security, too. It can be age-based, such as in Colorado where people under 65 may owe taxes on Social Security benefits but older people generally don’t. But other states tax Social Security benefits only if income exceeds a specified threshold amount. For example, Missouri taxes Social Security benefits only if your income tops $85,000, or $100,000 for married couples. Then there’s Utah, which includes Social Security benefits in taxable income, but allows a tax credit for a portion of the benefits subject to tax. Other states have different methods of taxing your Social Security check.

The state-by-state guide to taxes on retirees is updated annually based on information from state tax departments, the Tax Foundation, and the U.S. Census Bureau. Income tax rates and related thresholds are for the 2022 tax year unless otherwise noted.

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Make Sure Youre Taking Your Maximum Capital Loss

If youve invested in stocks or bonds and have a loss on paper, you might want to sell and realize that loss so you can claim it as a tax deduction. The process is called tax-loss harvesting, and it can net you a sizable deduction from your income.

The tax code allows you to write off up to a net $3,000 each year in investment losses. A write-off first reduces any other capital gains that youve incurred throughout the year. For example, if you have a $3,000 gain on one asset but a $6,000 loss on another, you can claim a deduction for the full $3,000 net loss.

Any net loss beyond that $3,000 has to be carried forward to future years, at which point it can be used. And even if you cant realize the full value of that net loss, it can still make sense to realize some loss, especially if it pushes your Social Security benefit into the tax-free area.

Tax-loss harvesting works only in taxable accounts, not special tax-advantaged accounts such as an IRA.

Are Social Security Benefits Considered Earned Income

For the year you are filing, earned income includes all income from employment, but only if it is includable in gross income. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, workers compensation benefits, or social security benefits.

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How Will I Know That I Have To Pay

The Social Security Administration will send a benefit statement each year in January to beneficiaries called Form SSA-1099. This form shows the total amount of benefits you received from Social Security in the previous year. With it, you will be able to complete your federal income tax return to find out if your benefits are subject to tax.

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To Find Out If Their Benefits Are Taxable Taxpayers Should:

• Take one half of the Social Security money they collected during the year and add it to their other income.

Other income includes pensions, wages, interest, dividends and capital gains.

• If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
• If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.

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Up To 85% Of A Taxpayer’s Benefits May Be Taxable If They Are:

• Filing single, head of household or qualifying widow or widower with more than $34,000 income.

The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

The tax filing deadline has been postponed to Wednesday, July 15, 2020. The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mailed a tax return will experience a longer wait. There is no need to mail a second tax return or call the IRS.

Reportable Social Security Benefits

Iowa does not tax Social Security benefits. While Social Security benefits are excluded from income when computing tax, some Social Security benefits are included as income in determining whether a taxpayer has sufficient income to file an Iowa return, and are included as income for purposes of computing the alternate tax on line 39. NOTE: This also affects you if you are single and use the Tax Reduction Worksheet. The reportable Social Security benefit is calculated using the worksheet below and entered on Step 4 of the IA 1040.

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Who’s Eligible For Social Security Disability Insurance

In addition to meeting the disability requirements, you must have worked long enough and recently enough to qualify for Social Security Disability Insurance.

First, you must meet the work test. This test is based on Social Security work credits and requires you to earn at least a minimum amount of income in wages or self-employment income per calendar year. For each $1,510 in wages or self-employment income that you earn per year you earn one credit. You can earn up to four credit per year. When you’ve earned $6,040 in 2022, you’ve earned your four credits for 2022.

Typically, you need at least 40 credits with 20 of these earned in the last 10 year period ending with the year of your disability. However, meeting the work test requirement can also depend on your age. It requires different amounts of Social Security credits since younger workers typically have not had enough time in the workforce to earn the full 40 credits. For those:

• Under age 24: You meet the work test if you earned 6 credits in the 3-year period when your disability began.
• Age 24 to 31: In general, you may qualify if you have credits equivalent to working half the time between age 21 and becoming disabled.
• Age 31 or older: You’ll need to have earned at least 20 credits in the 10-year period immediately before becoming disabled.

Second, review the Social Security Administration’s table to determine if you meet the duration of work test based on your age and when your disability began.

Social Security And State Taxes

Some of the confusion over the tax status of Social Security payments likely comes from the fact that each state treats Social Security differently. Many states treat Social Security the same way the federal government does, taxing every dollar of it based on the bracket you slot into with your full retirement income. This means that your Social Security check will be taxed twice once by the federal government and once by your state.

Other states only partially tax Social Security. They might only tax 50% of it, or have some other formula for determining exactly how much of your monthly check is subject to state taxes.

Finally, some states dont tax Social Security at all. For some of these states it is a special carveout, and for others it is simply because there is no state income tax, so none of your retirement income will be subject to any state tax.

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For that, they can thank an 8.7% cost-of-living adjustment designed to help seniors and other beneficiaries deal with a soaring inflation rate that is also the highest in 41 years. Heres a roundup of the latest announcements and other information you should know.

State Taxation Of Social Security Benefits

Most states don’t tax Social Security benefits. But the ones that do either follow the same federal provisional income rules or have special rules and income thresholds to determine what’s taxable.

These 4 states use the federal PI formula: Minnesota, North Dakota, Vermont, and West Virginia. The taxable portion of Social Security for these states is the same as the federal amount.

Nine states have special rules and income thresholds. Most use the federal modified adjusted gross income formula rather than the federal PI formula for taxing Social Security income.

These states are: Colorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, and Utah.

If you live in a state that counts Social Security benefits as taxable income, you should consult your state tax department for details and a qualified tax advisor.

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You Retire In A Foreign Country

If you retire outside of the United States, the District of Columbia, Puerto Rico, the U.S. Virgin Islands, Guam, the Northern Mariana Islands or American Samoa, you may not be able to receive Social Security payments, according to Investopedia. The countries where the U.S. will not send payments include Azerbaijan, Belarus, Cuba, Kazakhstan, Kyrgyzstan, Moldova, North Korea, Tajikistan, Turkmenistan or Uzbekistan. There may be exceptions, however, you will need to check with the Social Security Administration’s “Payments Abroad Screening Tool” to determine your eligibility to receive payments while living outside the U.S.