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How Is Tax On Social Security Benefits Calculated

How Does The Social Security Administration Calculate Benefits

How To Calculate Taxes on Your Social Security Benefits

Benefits also depend on how much money youâve earned in life. The Social Security Administration takes your highest-earning 35 years of covered wages and averages them, indexing for inflation. They give you a big fat âzeroâ for each year you donât have earnings, so people who worked for fewer than 35 years may see lower benefits.

The Social Security Administration also makes annual Cost of Living Adjustments, even as you collect benefits. That means the retirement income you collect from Social Security has built-in protection against inflation. For many people, Social Security is the only form of retirement income they have that is directly linked to inflation. Itâs a big perk that doesnât get a lot of attention.

History And Rationale For Taxing Social Security Benefits

For more than four decades, Social Security benefits were not subject to income tax. The Treasury Departments rationale for not taxing Social Security benefits was that the benefits under the Act could be considered as gratuities, and since gifts or gratuities were not generally taxable, Social Security benefits were not taxable.

Former Social Security Commissioner Robert M. Ball long argued that, since Social Security is an earned benefit, it should be taxed like other earned benefits, such as employer pensions. Workers pay income tax on private pensions to the full extent that their benefits exceed their contributions, with no income thresholds.

As a leading member of the Greenspan commission on Social Security in 1982-83, Ball had an opportunity to promote this idea. The subsequent Social Security Amendments of 1983 provided that up to 50 percent of benefits would be taxable for beneficiaries with incomes above certain levels. A decade later, the Omnibus Budget Reconciliation Act of 1993 provided for the taxation of up to 85 percent of benefits for individuals with modified AGI above somewhat higher thresholds. The provision has since remained unchanged.

Up To 85% Of A Taxpayers 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.

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States That Do Not Tax Ssi Benefits:

These 37 states do not tax Social Security retirement income: Alabama, Alaska, Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin and Wyoming.

Income Taxes And Your Social Security Benefit

Social Security Tax Equation

Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits .

You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service rules. If you:

  • file a federal tax return as an “individual” and your combined income* is
  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.
  • file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.
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    Are All Kinds Of Social Security Income Taxable

    All social security benefits are taxable in the same way. This is true whether theyre retirement, survivors, or disability benefits. Take note that Social Security benefits paid to a child under his or her Social Security number could be potentially taxable to the child, not the parent. Note: Supplemental Security Income, or SSI, is a non-taxable needs-based federal benefit. It is not part of Social Security benefits and does not figure into the taxable benefit formula.

    Finding your taxable income is an important part of filing taxes. Learn how to calculate your taxable income with help from the experts at H& R Block.

    Uncle Sam Can Tax Up To 85% Of Your Social Security Benefits If You Have Other Sources Of Income Such As Earnings From Work Or Withdrawals From Tax

    Getty Images

    Many people are surprised to learn that Social Security benefits can be taxed. After all, why is the government sending you a payment one day and asking for some of it back the next? But if you take a closer look at how the federal tax on Social Security is calculated, you’ll see that many people actually don’t pay any tax on their Social Security benefits.

    There’s no federal income tax on Social Security benefits for most people who only have income from Social Security. Thanks to the highest cost-of-living adjustment in 40 years, the average monthly Social Security check for a retired worker in 2022 is $1,658, which comes to $19,896 per year. That’s well below the minimum amount for taxability at the federal level.

    On the other hand, if you do have other taxable income such as from a job, a pension or a traditional IRA then there’s a much better chance that Uncle Sam will take a 50% or 85% bite out of your Social Security check. Plus, depending on where you live, your state might tax a portion of your Social Security benefits, too.

    payments sent by the Social Security Administration are not taxable.)

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    How Your Combined Income Impacts The Tax You Pay On Social Security Benefits

    Based on a married couple with a combined income of $62,000, we can return to the thresholds to determine how much in tax on Social Security benefits they might fact.

    The first $32,000 of combined income has no impact on whether or not a Social Security benefit is taxable. 50% of the amounts between $32,000 and $44,000 will be added and then 85% of the amount in excess of $44,000 will be added.

    As a rough calculation, a married couple with a combined income of $62,000 would have about $21,300 of taxable Social Security income:

    Since you can only spend the dollars you keep, you need to be familiar with the rules about when and how much you may pay in taxes on Social Security benefits.

    You dont have to be a tax expert I know Im not. But I do understand enough to know how to roughly calculate the amount of tax on Social Security benefits and you should too.

    If you need to dig deeper and get specific advice on your situation, please consult your tax advisor or CPA.

    How Beneficiaries’ Taxes May Increase In 2023

    How are Social Security Taxes Calculated?

    Increases in Social Security income next year may not give beneficiaries the ability to ramp up their retirement withdrawals without facing tax consequences, according to Joe Elsasser, a CFP and founder and president of Covisum, a provider of Social Security claiming software.

    For example, with a roughly 7% increase in tax brackets, beneficiaries may think they can take 7% more from their individual retirement account next year and have the same tax results.

    “That’s not the case, because of a larger amount of Social Security becoming taxable,” Elsasser said.

    However, there may be room for some beneficiaries to increase their retirement withdrawals while still not incurring a tax liability on their benefits, according to Elsasser.

    For example, a married couple who are both over 65 with $35,000 in Social Security benefits this year may take $23,967 in withdrawals in 2022 and pay no federal income tax, according to Elsasser’s calculations.

    Don’t wait to see your CPA by April 15 it’s too late.Brian Vosbergpresident of Vosberg Wealth

    In 2023, that couple’s Social Security benefit would increase to $38,045 with the COLA, and the amount they would withdraw may go up to $24,793, Elsasser said.

    If the couple’s Social Security benefits instead were $60,000, then they could withdraw $18,703 with no tax, which in 2023 would go up to $65,220 in benefits and slightly less $18,585 in possible withdrawals.

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    Does Social Security Income Count As Income

    Yes, but you can minimize the amount you owe each year by making wise moves before and after you retire. Consider investing some of your retirement savings in a Roth account to shield your withdrawals from income tax. Take out some retirement money after youre 59½, but before you retire to pay for expected taxes on your Social Security before you begin receiving benefit payments. You might also talk to a financial planner about a retirement annuity.

    Example Of Social Security Taxation

    Lets say a single, 68-year-old retired woman, Susan, receives a Social Security benefit totaling $18,000 for 2021.

    Susan collected $30,000 from other means throughout the year, so her provisional income is $39,000 .

    Then, 85% of Susans total Social Security benefit, $15,300, is subject to federal income tax.

    If you collect Social Security and anticipate youll need to pay federal taxes on your benefit, you can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of your monthly benefit. You can also have additional taxes withheld from your other income sources, such as a pension.

    Important: The following states also tax federal Social Security benefits, according to AARP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.

    Social Security benefits for retirees, beneficiaries, and disabled people are considered a form of income by the IRS. But only a portion is subject to taxation 15% of your total benefit for the year is always tax free.

    If your income for the year is more than $34,000, or more than $44,000 if youre married, then you can expect to pay income taxes on most of the benefits you collected.

    If youd prefer to pay taxes as you go to avoid a large bill during tax season, opt in to withholding by filling out the form and returning it to your local Social Security office by mail or in person.

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    How Social Security Benefits Are Taxed

    Social Security beneficiaries must pay federal income tax on a portion of their benefits if their income exceeds certain thresholds the portion of benefits that is taxable rises with income. Income for this purpose equals a taxpayers adjusted gross income plus tax-exempt interest, certain other tax-exempt income, and half of Social Security benefits this is referred to as modified AGI. A three-part formula applies:

    • For individuals with modified AGI below $25,000 and couples with modified AGI below $32,000, no Social Security benefits are taxable.
    • For individuals with modified AGI between $25,000 and $34,000 and couples with modified AGI between $32,000 and $44,000, up to 50 percent of benefits are taxable.
    • For individuals with modified AGI over $34,000 and couples with modified AGI over $44,000, up to 85 percent of benefits are taxable.

    For a detailed explanation of the tax calculation, see Appendix Table 1.

    Is There A Maximum Benefit

    The Retirement Café: Calculating Taxable Social Security Benefits

    Yes, there is a limit to how much you can receive in Social Security benefits. The maximum Social Security benefit changes each year. For 2022, itâs $4,194/month for those who retire at age 70 . Multiply that by 12 to get $50,328 in maximum annual benefits. If that’s less than your anticipated annual expenses, youâll need to have additional income from your own savings to supplement it.

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    Calculate My Social Security Income

    These days thereâs a lot of doom and gloom about Social Securityâs solvency – or lack thereof. And regardless of whether you think Social Securityâs future is secure, the fact remains that you shouldnât plan on living exclusively off your Social Security benefits. After all, Social Security wasnât designed to make up a retireeâs entire income.

    Still, many people do find themselves in the position of having to live off their Social Security checks. And even if you have other income sources in retirement, Social Security can make up a significant part of your retirement income plan. That’s why itâs important to know all the rules surrounding eligibility, benefit amounts, taxation and more.

    Do you need help managing your retirement savings? To find a financial advisor who serves your area, try our free online matching tool.

    Who Is Eligible For Social Security Benefits

    Anyone who pays into Social Security for at least 40 calendar quarters is eligible for retirement benefits based on their earnings record. You are eligible for your full benefits once you reach full retirement age, which is either 66 and 67, depending on when you were born. But if you claim later than that you can put it off as late as age 70 youâll get a credit for doing so, with larger monthly benefits. Conversely, you can claim as early as age 62, but taking benefits before your full retirement age will result in the Social Security Administration docking your monthly benefits.

    The bottom line: Youâre eligible for Social Security Benefits if youâve paid into the system for at least a decade, but your actual benefits will depend on what age â between 62 and 70 â you begin to claim them.

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    Does Working Past Age 70 Affect Your Social Security Benefits

    Dear Carrie,

    I’m turning 70 and about to start collecting Social Security even though I’m still working and intend to keep working for a couple more years. Since I’m past full retirement age, will I continue to pay Social Security taxes? Also, will continuing to work affect my monthly benefit?

    A Reader

    Dear Reader,

    First, congratulations on waiting until 70 to collect your Social Security benefits. By doing so, you maximized your monthly payout. That’s a smart move for many folks!

    But while Uncle Sam gives you a bonus for waiting to collect Social Security benefits, he doesn’t give you a dispensation from paying Social Security taxes. As long as you have earned income , you’re required to pay Social Security taxes on up to the annual payroll limitation$147,000 in 2022. So, yes, if you continue to work, you’ll continue to pay into Social Security and other payroll taxes.

    Fortunately for you, since you’re past your full retirement age , there’s no benefit reduction based on income. You’re entitled to full benefits no matter your income level. However, earned income may impact your benefit if you take Social Security before your FRA.

    Whether or not your continued income has a positive effect on the amount of your monthly Social Security benefit depends on how much money you made in the past and how much you’re making now. Here’s why.

    Three Ways To Reduce The Taxes That You Pay On Benefits

    Taxable Social Security Benefits calculation, Inclusion of SS benefit

    Is Social Security taxable? For most Americans, it is. That is, a majority of those who receive Social Security benefits pay income tax on up to half or even 85% of that money because their combined income from Social Security and other sources pushes them above the very low thresholds for taxes to kick in.

    But there are three strategies you can useplace some retirement income in Roth IRAs, withdraw taxable income before retiring, or purchase an annuity, to limit the amount of tax you pay on Social Security benefits.

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    State Taxes On Social Security

    Twelve states tax Social Security benefits in some cases. Check with your state tax agency if you live in one of these statesColorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, or West Virginia. As with the federal tax, how these agencies tax Social Security varies by income and other criteria.

    How To Calculate My Social Security Benefits

    You can use the Money Help Center calculator to determine how much Social Security you will get and how income tax may impact your benefits and income. You need to plan for retirement by considering how you will be taxed once your working life ends. You dont want to get an unpleasant surprise when you start earning your retirement income or getting your benefits and realize it is less than you expected because of tax withdrawals.

    At the same time, Social Security can be a smart part of your retirement plan. Even if you are taxed at the highest level, you may still benefit. After all, from virtually any other source of income, 100% of your wages and income will be taxed after retirement. Dollar for dollar, Social Security retirement benefits can still be a better deal as far as taxation, than other sources of retirement.

    As you plan for your golden years, it is important to keep in mind all the sources of income you may have once you finish working. Plan ahead and consider the tax impact on your income as well as any tax advantages you can secure today while saving for retirement. Use the Money Help Center calculators to help you plan. Our calculators are free, have no bias and never ask you for your personal information, such as contact information or e-mail address. You can use them at any time and instantly get information to help you plan for your financial future.

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