Raising Or Eliminating The Tax Cap
Raising or even eliminating the cap on taxable wages would mitigate the erosion of the Social Security tax base. Rising inequality, driven by rapid wage growth among the highest earners, means a greater proportion of wages are above Social Securitys tax cap.
There is precedent for either approach. Policymakers have raised the Social Security payroll tax cap many times, and they eliminated the Medicare payroll tax cap in 1994. Two prominent deficit-reduction committees have proposed raising the tax cap so that it covers 90 percent of all earnings and then pegging it to that level in the future. Others have proposed eliminating the tax cap altogether.
Changes to the tax cap would affect only the highest-earning workers. In any given year, about 6 percent of workers earn more than the current tax cap. Over a lifetime, 20 percent of workers earn more than the tax cap for at least one year. Most of these workers have high lifetime earnings and thus also receive relatively high Social Security benefits. Raising the payroll tax cap to fund Social Security benefits is broadly popular, even among the highest earners about half of millionaires support raising the cap.
Raising the tax cap could affect Social Security benefits as well, as policymakers would face a choice about how to account for any newly taxed earnings specifically, whether and how to include them as part of the average indexed monthly earnings, or AIME, used to calculate benefits. There are three options here:
Earning Too Much May Reduce Your Net Earnings Due To Taxation
Although you may boost your Social Security payout if you continue to earn at high levels, you may find that your net earnings actually decrease because your benefits have become taxable.
If you file taxes as an individual and your combined income is between $25,000 and $34,000, up to 50% of your benefits may be taxable. Above $34,000, as much as 85% of your Social Security benefits will be taxable.
For joint filers, the threshold for 85% taxation is $44,000, with amounts between $32,000 and $44,000 subject to taxes of up to 50%.
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Calculator: How Much Of My Social Security Benefits Is Taxable
September 15, 2022Keywords: calculator, retirement, Social Security, tax planning
Social Security benefits are 100% tax-free when your income is low. As your total income goes up, youll pay federal income tax on a portion of the benefits while the rest of your Social Security benefits remain tax-free. This taxable portion goes up as your income rises, but it will never exceed 85%. Even if your annual income is $1 million, at least 15% of your Social Security benefits will stay tax-free.
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Benefit Income Owed As Income Tax By Total
Because of the progressivity of income tax rates, higher-income families owe higher percentages of their Social Security benefits as income tax than do lower-income families. For example, a beneficiary family with income in the highest quartile pays a larger percentage of its benefits as income tax than does a family in the lowest quartile. For each successive quartile, from lowest to highest, the projected percentages should increase.
To provide a consistent basis for comparing income over time, MINT projects the amounts that will define the income-quartile boundaries among beneficiary families from 2010 to 2050, and expresses them relative to the national AWI . For example, among beneficiary families in 2010, a family with total income equal to at least 2.273 times the national AWI was in the fourth income quartile. A beneficiary family was in the third income quartile in 2010 if it had income between 1.223 and 2.273 times the AWI. A beneficiary family with income between 0.624 and 1.223 times the AWI was in the second income quartile, and a beneficiary family with income of less than 0.624 times the AWI was in the first income quartile.
| Year |
|---|
| 0.490 |
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.
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How Are Social Security Survivor Benefits Calculated
Survivor benefits are based on the deceased person’s income, along with the age of the beneficiary and their relationship to the deceased. Generally, benefits are calculated as follows:
- Widow or widower, at full retirement age or older: 100% of the deceased person’s basic benefit amount
- Widow or widower, age 60 or older, but under full retirement age: 71%99% of the deceased person’s basic benefit amount
- Widow or widower, any age, with a child younger than age 16: 75% of the deceased person’s benefit amount
- Child: 75% of the deceased person’s benefit amount
Additionally, a family’s total benefit is capped between 150% and 180% of the deceased person’s benefit amount.
Income Taxes On Social Security Benefits
Research Summary: Income Taxes on Social Security Benefits
Since 1984, Social Security beneficiaries with total income exceeding certain thresholds have been required to pay federal income tax on some of their benefit income. Because those income thresholds have remained unchanged while wages have increased, the proportion of beneficiaries who must pay income tax on their benefits has risen over time. A Social Security Administration microsimulation model projects that an annual average of about 56 percent of beneficiary families will owe federal income tax on part of their benefit income from 2015 through 2050. The median percentage of benefit income owed as income tax by beneficiary families will rise from 1 percent to 5 percent over that period. If Congress does not adjust income tax brackets upward to approximate the historical ratio of taxes to national income, the proportion of benefit income owed as income tax will exceed these projections.
Patrick Purcell is with the Office of Retirement Policy, Office of Retirement and Disability Policy, Social Security Administration. Questions about the analysis should be directed to the author at 358-6348.
The findings and conclusions presented in this paper are those of the authors and do not necessarily represent the views of the Social Security Administration.
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What Benefits Does Social Security Disability Insurance Offer
The amount you receive from Social Security Disability Insurance depends on your average lifetime earnings before your disability began. Generally, the more you earned over a longer period, the more you’ll benefit, up to a maximum amount. The Social Security Administration calculates your disability benefit based on the amount of your Social Security “covered earnings.” Generally, these are your past earnings that have been subject to Social Security tax.
Your benefits are determined by averaging your covered earning over the 35-year period representing your top earning years. The SSA sees this as your average indexed monthly earnings . The SSA then applies a formula to your AIME to calculate your primary insurance amount . This serves as the base figure for the SSA to calculate your Social Security Disability Insurance benefit amount.
To understand your entire covered earnings history, the SSA provides access to your annual Social Security Statement. If you receive other disability benefits from private insurers, this will not impact your Social Security Disability Insurance benefits.
The Social Security Disability Insurance program rules limit your overall benefit under certain conditions. The combination of Social Security Disability Insurance and other government-sponsored disability programs cannot be more than 80% of the average amount earned before you became disabled. If this happens, the SSA will reduce your payments.
Three Ways To Reduce The Taxes That You Pay On Benefits
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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Taxable Social Security Benefits Calculator
Since retirement income is all about the dollars you get to keep in your pocket, its helpful to know how much of your Social Security benefits youll have to give up in taxes.
Thats what this taxable Social Security benefits calculator is designed to do: Give you an estimate of how much youll have to pay in taxes on your monthly benefits.
Before you use this calculator, it may be helpful for you to read a few of my articles on the taxation of Social Security in conjunction with using this calculator.
Social Security Cola 2023 Increase: Payment Dates For The 87% Benefit Hike
Seniors and millions of other Social Security recipients will soon get their biggest benefit hike since 1981, with the pension program set to deliver an 8.7% cost-of-living increase in 2023.
The annual cost-of-living adjustment, or COLA, takes effect with the December benefits, but those payments will largely be made in January 2023, according to the Social Security Administration. With the increase, the average benefit check will rise more than $140 to $1,827 a month, compared with the typical benefit of $1,681 in 2022.
The Social Security Administration adjusts payments annually based on the inflation rate, which this year has spiked to its highest levels in four decades. Seniors lost purchasing power during this year since the 5.9% they received in 2022 is well below this year’s rise in prices overall, the average Social Security benefit fell short of inflation by more than $500 this year, according to a calculation by the advocacy group the Senior Citizens League.
As a result, 4 in 10 seniors said they drained their emergency savings to stay afloat this year, the group said.
She added, “We have just been through a period where retirees are trying to cope and manage, and they have never been through anything like this before.”
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What To Do To Minimize Your Tax Bite
Experts say the goal is to identify a blend of retirement income that works for your personal situation and keeps your total or combined income under certain limits.
If you have money saved both in retirement and other accounts, you may be able to come up with an estimate using tax software and varying the amount of IRA withdrawals, Elsasser said.
“But this is definitely the area of tax-focused financial planners,” Elsasser said.
Whatever your budget is, you should shoot to figure out where that income is going to come from by Jan. 1, according to Vosberg.
“Don’t wait to see your CPA by April 15 it’s too late,” Vosberg said. “The income you’ve already received is pretty much set in stone.”
Beneficiaries who continue with the status quo of retirement withdrawals and bank interest may find themselves paying more taxes at the end of next year if they’re not proactive, he said.
To minimize your tax bite, try taking withdrawals from nontaxable income sources, such as Roth individual retirement accounts, Vosberg said.
As Federal Reserve rate hikes go into effect, it would be wise to also pay attention to how much interest you may be making on savings, including money market accounts and certificates of deposit, that can increase your income, he said.
Keep in mind that having higher income due to the Social Security COLA may also affect how much you pay for health-care coverage, Vosberg said.
Federal Taxation Of Social Security Benefits And Effect On Vermont
At the federal level, the personal income of a Social Security beneficiary determines how much of the Social Security benefits are taxed. This taxable portion of Social Security benefits may become part of a Vermonters Adjusted Gross Income at the federal level. Federal AGI flows through to Vermont and becomes the starting point for determining Vermont taxable income.
The Vermont exemption allows income-eligible taxpayers to subtract all or part of federally taxable Social Security benefits from their AGI. This means that the federally taxable portion of Social Security benefits is eliminated or reduced for Vermont income-eligible taxpayers receiving Social Security benefits.
For a breakdown of the federal taxation of Social Security benefits, see the table below. For more on federal taxation of Social Security benefits, please read this overview by the Social Security Administration.
| Table 1: Federal Taxation of Social Security Benefits by Income and Filing Status |
|---|
| Single/Separate/Widow/HoH |
| Up to 85% |
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What Is Social Security Disability Insurance
Social Security Disability Insurance is a social insurance program funded by payroll taxes meant to help you if you become disabled. The program’s administrator, the Social Security Administration , generally allows you to earn coverage benefits if you meet their definition of disabled and are unable to work for a year or more.
The Social Security Disability Insurance program provides modest though vital benefits to you if you have suffered a serious and long-lasting medical condition that meets Social Security’s strict definition of disability. As a result, you can receive benefits if you meet the eligibility requirements.
How To Report Social Security Income On Your Federal Taxes
Every Social Security recipient receives a benefit statement, Form SSA-1099, in January showing the total dollar amount of benefits received during the previous year. This includes retirement, survivor’s, and disability benefits.
Take that total shown in Box 5 and report it on Line 6a of Form 1040 or Form 1040-SR The IRS provides a worksheet to help you calculate what portion of your benefits are taxable and add the amount to your other income. More simply, you can use online tax software or consult a tax professional to crunch the numbers.
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How Does Full Retirement Age Affect Your Social Security Benefits
If you claim your benefits at full retirement age, you will receive your standard Social Security benefit amount. If you claim prior to FRA, you will be subject to early filing penalties that reduce your benefit by the following amounts:
- 5/9 of 1% for each of the first 36 months before FRA
- 5/12 of 1% for each subsequent month before FRA
This amounts to a 6.7% annual reduction for each of the first three years and an additional 5% reduction for each following year before FRA. If you claim benefits at 62 with an FRA of 67, you will face a full 30% reduction in benefits.
By contrast, if you claim benefits after FRA, you receive delayed retirement credits valued at 2/3 of 1% per month. This results in an 8% annual increase to your monthly benefit. Delayed retirement credits can be earned until age 70, after which time there is no financial benefit to delaying your claim. Delayed retirement credits cannot be earned if you are claiming either spousal or survivor benefits.
How Much Is Social Security Tax
The Social Security tax is part of the FICA taxes withheld from your paychecks. For 2022, the total Social Security tax rate is 12.4% on a workers first $147,000 in wages. The wage base is set by Congress and may change annually.
These are the most recent Social Security wage bases.
| Tax Year | |
|---|---|
| 2017 | $127,200 |
If you work for an employer, youll be on the hook for 6.2% of your pay. Your boss will kick an additional 6.2% and submit the combined 12.4% to the federal government.
If youre self-employed, youre responsible for the entire 12.4%. The IRS offers a self-employment tax deduction that can lessen the sting.
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Are Social Security Benefits Taxable
Up to 50% or even 85% of your Social security benefits are taxable if your provisional or total income, as defined by tax law, is above a certain base amount. Your Social Security income may not be taxable at all if your total income is below the base amount.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Tax Credits: Social Security Income
The general rule is that most taxable social security benefits are taken into account as income and non-taxable benefits are ignored. However, there are some exceptions to this general rule for example income-based jobseekers allowance and carers allowance supplement are taxable but not counted as income for tax credits. You should check each individual benefit carefully.
State retirement pension is not included as social security income but HMRC ask for it to be included as pension income under ‘other income’ in box 5.6 of the claim form – the significance is that the other income category is broadly the Step One equivalent and therefore eligible for the £300 deduction.
Welfare Supplementary Payments were introduced in Northern Ireland only to reduce the impact of some welfare changes including the introduction of the benefit cap, changes to employment and support allowance and personal independence payment, loss of disability premiums/elements in certain benefits, loss of carer’s allowance in some cases, universal credit and changes to housing benefit. Claimants may be eligible for more than one WSP if applicable. These are awarded automatically and there is no need to claim them. The broad principle is that the tax – and therefore tax credit – treatment of a WSP paid by the NI Executive follows the tax treatment of whichever social security benefit they are topping up.
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