Understanding The History Of Taxes On Social Security
To understand the whole issue, we have to put some context around this. Lets back up and look at the history of taxation, how it works and finally answer the question once and for all
Social Security benefits were not taxable from January of 1937, when the first Social Security benefit was paid, until the beginning of 1984. The original thinking was that since FICA taxes are paid with after-tax dollars, the benefit from them should be tax-free.
This all changed as a result of the Greenspan Commission.
Congress and President Reagan appointed this group in 1981 to figure out how to fix Social Security. Much like we hear all about today, the Social Security trust fund was also very close to running out of money in the early 1980s.
They had to do something and fast!
A Divorced Spouse May Be Eligible For Benefits
If you are divorced, you may qualify for Social Security benefits based on your ex-spouses work record. To be eligible for benefits, your ex-spouse must have reached the age at which they are eligible to begin receiving benefits .10
To qualify, you need to:
- have been married to your ex-spouse for at least 10 years
- have been divorced two years or longer
- be at least 62 years old
- be unmarried and
- not be entitled to a higher Social Security benefit based on your own work history.
If your former spouse is deceased, you may still receive benefits as a surviving divorced spouse , assuming that your ex-spouse was entitled to Social Security benefits, your marriage was at least 10 years, you are at least 60 years old, and you are not entitled to a higher benefit amount based on your own work history. If you remarry before the age of 60, you will lose the ability to receive a survivor benefit from your deceased ex-spouse.10
If your former spouse is living, the maximum amount that you are eligible to receive is 50% of what your former spouse is due at full retirement age. To receive the maximum benefit, you will need to wait until you have reached your own full retirement age.10
Your benefits are unaffected should your former spouse elect to take Social Security before reaching full retirement age or if your ex-spouse starts a new family.10
Continuing To Work May Reduce Your Benefits
Another consideration when determining whether to take Social Security benefits before your full retirement age is that your work activity during this time may decrease your benefit payments.
After you reach your full retirement age, you can earn as much as you like and still receive your full Social Security benefits. However, the rules for how work affects your benefits are complicated if you would like to work while receiving benefits, you should contact the Social Security Administration before making any decisions.
Note: You should apply for Medicare at age 65, even if you decide to continue working. If youre still working, you might need just Part A of Medicare your local Social Security office can tell you whether taking Part B is a good idea. In some cases, waiting to apply will result in higher premiums.
Generally, Social Security recipients who have not yet reached full retirement age will see their benefits reduced by $1 for every $2 they earn over an annual limit. Once recipients reach the year in which they attain their full retirement age, the reduction changes to $1 for every $3 they earn over a different limit. Once recipients reach the month and year of full retirement age, there is no limit on work activity.
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Simplifying Your Social Security Taxes
During your working years, your employer probably withheld payroll taxes from your paycheck. If you make enough in retirement that you need to pay federal income tax, then you will also need to withhold taxes from your monthly income.
To withhold taxes from your Social Security benefits, you will need to fill out Form W-4V . The form only has only seven lines. You will need to enter your personal information and then choose how much to withhold from your benefits. The only withholding options are 7%, 10%, 12% or 22% of your monthly benefit. After you fill out the form, mail it to your closest Social Security Administration office or drop it off in person.
If you prefer to pay more exact withholding payments, you can choose to file estimated tax payments instead of having the SSA withhold taxes. Estimated payments are tax payments that you make each quarter on income that an employer is not required to withhold tax from. So if you ever earned income from self-employment, you may already be familiar with estimated payments.
In general, its easier for retirees to have the SSA withhold taxes. Estimated taxes are a bit more complicated and will simply require you to do more work throughout the year. However, you should make the decision based on your personal situation. At any time you can also switch strategies by asking the the SSA to stop withholding taxes.
How Does Income Affect Social Security Payments
If you begin Social Security when you are
| In the years before you reach full retirement age | In the year you turn full retirement age | Older than full retirement age |
|---|---|---|
| $1 is deducted from your benefits for every $2 you earn above the annual earnings1 limit | $1 is deducted from your benefits for every $3 you earn over the limit | No limit on earnings1 |
| Annual earnings limit: $51,960 in 2022 |
If you retire during a year in which you have already earned more than the yearly earnings limit, you may receive a full Social Security check for any whole month you are considered retired , regardless of earnings prior to retirement.
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How Much Of Social Security Is Counted As Income
You must declare at least 50 percent of your Social Security benefits, and you may have to pay income taxes on them. If your income exceeds $ 44,000 and you are married and applying jointly, 85 percent of your benefits may be taxable.
How much of Social Security benefits are taxable income?
For a combined income of $ 25,000 to $ 34,000, up to 50 percent of Social Security benefits may be subject to normal income taxes. For income over $ 34,000, up to 85% of the benefits can be taxed. For jointly married filing, the first $ 32,000 is not taxed.
Is Social Security income considered earned income?
For the year in which the return is filed, earned income includes all employee income, but only if it is computable in gross income. The earned income does not include amounts such as pensions and annuities, social benefits, unemployment benefits, work benefits or social security benefits.
Social Security Reporting Information And Full Retirement Age Table For Homestead Exemption Applicants
This guidance document is advisory in nature but is binding on the Nebraska Department of Revenue until amended. A guidance document does not include internal procedural documents that only affect the internal operations of DOR and does not impose additional requirements or penalties on regulated parties or include confidential information or rules and regulations made in accordance with the Administrative Procedure Act. If you believe that this guidance document imposes additional requirements or penalties on regulated parties, you may request a review of the document.
This guidance document may change with updated information or added examples. DOR recommends you do not print this document. Instead, at revenue.nebraska.gov to get updates on your topics of interest.
Per Neb. Rev. Stat. § 77-3504 of the homestead exemption laws, household income must include social security retirement and Tier I railroad retirement benefits.
Social Security Conversion from disability benefits to retirement benefits occurs at FULL RETIREMENT AGE per the Social Security Administration.
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Should I Have Taxes Taken Out Of My Social Security Check
Answer: Taxes do not need to be withheld from Social Security benefits, but voluntary withholding can be a way to cover any taxes you owe on Social Security benefits and any other income.
How much tax is taken out of your Social Security check?
You will be taxed on: Up to 50 percent of your benefits if your income is between $ 25,000 and $ 34,000 for an individual or $ 32,000 to $ 44,000 for a married couple filing a joint declaration. up to 85 percent of your benefits if your income is greater than $ 34,000 or $ 44,000 .
Are Social Security benefits taxed after age 66?
Once you reach full retirement age, your Social Security benefits will not be reduced, no matter how much you earn. However, social security benefits are taxable. If your total income is greater than $ 44,000, up to 85% of your benefits may be subject to income tax.
Three Things To Keep In Mind
For most people, Social Security benefits will represent a portion of their income during retirement yearsnot their sole source of income. It’s important to be aware of three important factors that will affect the amount of Social Security benefits you will eventually receive:
- When you choose to begin taking benefits
- Whether or not your benefits are taxed
- Whether or not you continue working
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What Is The Average Person Social Security Benefit Per Month
California. In Americas most populous state, an estimated 4.3 million retirees who collect Social Security can expect to receive an average of $ 1,496.13 per month from the program in 2020, or $ 17,953.56 over the course of the year. California is another state where the benefits are below average for the United States.
How much does the average person collect on Social Security?
The average social security allowance was $ 1,543 per month in January 2021. The maximum possible social security allowance for those who retire at full retirement age is $ 3,148 in 2021.
Why You Might Start Collecting Long Before Age 70
So why wouldn’t you do all that you can to delay starting to collect your benefits as close to 70 as possible? Here’s the main reason: If you can’t afford to delay.
Many people just can’t afford to retire at, say, 62, even though they might want to. For example, according to the 2022 Retirement Confidence Survey by the nonpartisan Employee Benefit Research Institute, 34% of workers surveyed said that the total value of their savings and investments, excluding the value of their primary home, was less than $25,000.
Even worse, roughly 1 in 5 people had less than $1,000 saved. If you end up retiring earlier than planned and don’t have a nest egg sufficient to support you, you might have to start Social Security benefits as soon as possible.
Here are some more circumstances that can make it smart to start collecting early:
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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.
Income Plays A Role In Social Security Benefits
The Social Security program is primarily funded through payroll taxes. The 12.4% tax rate is typically split between employees and employers, meaning most workers contribute 6.2% of their income to the Social Security trust fund each year. Notably, current law limits the income subject to Social Security payroll tax, though the limit rises each year to keep pace with rising wages.
For example, the maximum taxable earnings limit is $160,200 in 2023, up from $147,000 in 2022. This chart from the SSA shows the maximum taxable limits dating back to the inception of the Social Security program. Notably, the same earnings limits also apply to benefit computation, meaning any worker who exceeds the maximum taxable earnings limit is on track to qualify for the maximum Social Security benefit.
Very few Americans actually meet that criterion, though. In fact, only 6% of workers have wages that exceed the maximum taxable limit each year, according to the SSA. That means only 6% of workers are on track to qualify for the $4,555 monthly benefit in 2023. But there is still one more variable to consider.
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Do You Have To Pay Taxes On Social Security After Age 70
Heres why: Every dollar you make beyond the 85% threshold will result in 85 cents taxation of your benefits, plus youll have to pay extra income taxes. After the age of 70 there is no increase anymore, so you should claim your benefits even if they will be partially subject to income tax.
At what age is Social Security not taxable?
Between the ages of 65 and 67, depending on the year of birth, you are at full retirement age and are eligible for tax-free Social Security retirement benefits.
How much can a 70 year old earn before paying tax?
The tax exemption thresholds for the elderly and for the young have varied over the past 20 years. Seniors pay no taxes until they earn $ 32,279 annually, while younger families have an effective tax-exempt threshold of $ 20,542.
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 Much Of Your Social Security Is Taxable After Reaching Retirement Age
Notably, 85% of your Social Security is potentially taxable after retirement. What your income is at the time will determine how much of your benefits are taxed. If you file as an individual and your income is between $25,000 and $34,000, 50% of your benefits will be taxed. Any amount over $34,000 will qualify 85% of your benefits to be taxed. If you are married filing jointly, 50% will be taxable if your combined income with your spouse is between $32,000 and $44,000. Over $44,000, 85% of benefits are taxable.
Working While Collecting Social Security
If your Social Security benefits are your only source of income, they are generally not taxed by the federal government. However, if you work while receiving Social Security, or receive income from other sources , part of your Social Security benefits may be taxable.
Social Security benefits are subject to tax if the persons combined income exceeds certain limits. Up to 85% of Social Security benefits can be taxed.
In addition, if you work after retirement and you start receiving Social Security benefits, your monthly payments may be affected, depending on your age.
The key is how close you are to full retirement age, which varies from 66 to 67 depending on the year of your birth. For people born 1943 to 1954, the full retirement age is 66, and it’s 67 for people born in 1960 or after. You can find your full retirement age at socialsecurity.gov.
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Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January detailing your benefits during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security website.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
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What If You Are Divorced
If you are divorced from a worker who is entitled to a Social Security retirement benefit, and your marriage lasted at least 10 years, you may have the opportunity to claim benefits on your ex-spouse’s recordeven if he or she remarried.
- If you are divorced, you can receive spousal benefits on your ex-spouse’s record if you are unmarried, at least 62 years old, and the benefit you’re entitled to on your ex-spouse’s record is more than what you could get through your own record.
- If your ex-spouse dies, you may be entitled to a survivor’s benefit on his or her record. You can claim as early as age 60 for reduced benefits, or receive full benefits at your full retirement age. And if you remarry after age 60, there’s no impact on your eligibility.
You Need To Pay Down Debt
There are some debts you need to tackle before you retire. If you have high-interest debt, claiming Social Security early can help you pay the debt down. Depending on the interest rate youre paying, the 8% yearly boost to your benefits that you receive for each year you wait past full retirement age might not be worth the increased monthly benefit. Using the early benefits to reduce or eliminate your debt earlier could mean youll be able to keep more of your benefits in the future.
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