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Social Security Benefits That Are Taxable

Is It Likely That Benefits Will Be Cut

Is Social Security Taxable?

Some experts doubt that a big slash in Social Security benefits is forthcoming.

The ramifications of that event would be beyond traumatic for everyone in the country, said Joseph E. Roseman Jr., a Social Security expert and retirement planner at Retirement Capital Planners. Youve got a national disaster on your hands.

Thats why he thinks Congress will step in before 2035 to prevent such a deep cut in benefits. Mary Beth Franklin, a Social Security expert and contributing editor for Investment News, agrees that a big cut in benefits is unlikely.

As pensions are disappearing, people are relying more on Social Security, she said. Because of the programs popularity, politicians wont want to tinker with benefits for existing retirees and will likely have to find other solutions to the trust fund shortfall.

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Earnings Withheld While Working Increases Social Security Benefits

Its possible to receive higher Social Security benefits by having your earnings withheld while you work. The Social Security Administration calculates the appropriate amount of withholding to deduct from your monthly benefit. During retirement, your government holds back the entire amount to cover the withholding. For example, if you receive $1,000 per month in Social Security, you could end up with withholding $4,000 from that same check.

In addition to having your benefit withheld, your Social Security benefits will be reduced if you work past full retirement age. For those born between 1943 and 1959, the full retirement age is 66 or 67 years old. For every two dollars of income over $18,960, the Social Security agency will withhold $170 from your benefit. This means that youll get a reduced benefit of $520 per month.

In the year 2022, the earnings cap will change. By then, the limit will increase to $19,560 per year. Youll still be allowed to earn up to 40 credits. The Social Security system will withhold some of your benefits if you earn more than this amount. This limit can change from year to year. The full retirement age will apply to you in 2022, so youll need to make sure you have reached this milestone before the end of your retirement.

Will You Be Taxed On Your Social Security Benefit

The next question that typically comes to mind when you tell current or future retirees that Social Security benefits are taxable is, “Will my benefits be taxed? Right now, the answer is pretty much 50-50 between yes and no, although the pendulum continues to swing more toward seniors being taxed than not being tax on their Social Security income.

In 1984, when the taxation of benefits was implemented, persons and couples filing jointly whose modified adjusted gross income plus one-half of benefits exceeded $25,000 and $32,000, respectively, were subject to the tax. In this instance, the tax meant that up to half of their Social Security benefits could face federal ordinary income tax rates.

Then, in 1993, a second tier of taxation was introduced under the Clinton administration. Using the same formula as above — i.e., MAGI plus one-half of benefits — single filers and couples filing jointly with more than $34,000 and $44,000, respectively, will be subjected to this second tier. This new tier allows up to 85% of Social Security benefits to be taxed at the federal ordinary income tax rate.

Now, here’s the catch: These income thresholds have never been adjusted for inflation. The fact that these thresholds haven’t budged for 35-plus and 25-plus years, respectively, is a big reason why more and more seniors are being subjected to this tax, and why you currently are, or may be in the future, paying back some of your benefits to the Social Security Administration.

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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 $1,470 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 $5,880 in 2021, you’ve earned your four credit for 2021.

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.

State Taxation Of Social Security Benefits

Is Social Security Taxable Income 2021 / 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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The Social Security Cola Could Be Reduced

Retirees receiving Social Security benefits typically see their checks increase slightly most years to keep pace with inflation. These cost-of-living adjustments — or COLAs — are based on the consumer price index. The last few years saw a 2.8% boost in both 2018 and 2019, a 1.6% increase for 2020 and a whopping 5.9% increase for 2021.

Determine When To Take Payments

Before even thinking about taxes, to make the most of your benefit, the first step is to figure out the best time to start collecting it. While 65 was once the universal age when people left work, and began collecting Social Security and other pension benefits, that is no longer the case. Today, the Social Security full retirement age for those born in 1937 or earlier is 65, but it rises gradually for those born in later years and tops out at 67 for anyone born after 1959.

If you qualify for benefits and are planning when to begin taking them, be aware that the longer you wait the higher the monthly payment you will receive. You can start your benefits as early as 62, but the amount you receive will be less than what you would get at full retirement age. If you hold out until age 70, however, you will get a yearly percentage increase to your benefits calculated based on the year you were born.

When you reach age 70, your benefits no longer continue to increase even if you continue to delay taking them. Since the average lifespan keeps lengthening, you may want to consider delaying your benefits so that you receive the highest amount when you need it. Your decision will, of course, be affected by numerous factors that include your financial situation and your health. Your CPA can help you determine whats best for you.

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Sorry Folks But The Taxation Of Benefits Is Here To Stay

To be crystal clear, there aren’t many people that like this tax, as it’s often viewed as a means of being double taxed . Nevertheless, even with overwhelming public support to shelve the taxation of benefits, it’s not going to happen.

The reason? Social Security is, once again, facing an imminent cash shortfall. Despite what looks to be a healthy trust fund ratio of 289% as of 2018, the Social Security Board of Trustees has forecast that the program’s nearly $2.9 trillion in asset reserves will be completely gone by 2035. If Congress were to fail to act, this would lead to an across-the-board benefit cut for retirees of up to 23%. To just lay this out in a no-nonsense way, Social Security needs all the revenue it can get right now.

If lawmakers were to end the taxation of benefits, it could definitely lead to a modest boost in income for middle-class and upper-income retired individuals and couples. However, it would be removing quite a bit of money from Social Security each year. Last year, the taxation of benefits accounted for $35 billion of the $1 trillion collected, and over the next decade an estimated $596 billion will be collected by the Social Security program solely from taxing benefits. Removing this income from the equation would only speed up the process by which Social Security’s asset reserves would be exhausted, thereby leading to even quicker across-the-board benefit cuts.

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Income Tax Withholding Tables

Are your social security benefits taxable?

2021 federal withholding tables are a bit different than they used to be. The IRS adjusts income threshold every year for inflation. That means the federal income withholding tables change every year, in addition to the tax brackets. These are the 2021 withholding tax table updates:

  • Changes in tax rates and brackets
  • New computational bridge for 2019 or earlier W-4s
  • No withholding allowances on 2020 and later W-4s
  • No personal exemptions still in effect
  • Supplemental tax rate remains 22%
  • Backup withholding rate remains 24%

There are also rate and bracket updates to the 2021 income tax withholding tables. The federal withholding tax table that you use will depend on the type of W-4 your employees filled out and whether you automate payroll. Employers have the option to use a computational bridge to treat 2019 or earlier W-4s as if they were 2020 or later W-4s, specifically for tax withholding purposes. If your employees filled out a 2020 or later W-4, it is important to note that they can no longer request adjustments to their withholding allowances. Instead, there is a standard withholding and a Form W-4, Step 2, Checkbox withholding section.

If youre unsure of which federal withholding tax table to use for an employee, here is an overview:

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Taxing Social Security Benefits Is Sound Policy

Social Security beneficiaries with higher incomes pay income tax on part of their benefits. Those with incomes below $25,000 pay no tax on benefits, while those with the highest incomes pay tax on as much as 85 percent of their benefits. This arrangement is sound for several reasons:

  • The substantial proceeds from taxing Social Security benefits are credited to the Social Security and Medicare trust funds, strengthening the programs financing.
  • The taxation of benefits is broadly progressive, since people with low incomes pay nothing and the tax rate on benefits increases with income.
  • As an earned benefit, Social Security should be subject to tax, like other earned benefits, such as employer pensions.
  • Social Securitys tax treatment is more favorable than that of private defined-benefit pensions, primarily because of the protections for low-income beneficiaries.

Social Security Beneficiaries Will Get A Historic Raise Next Year But There Are A Few Strings Attached

Social Security benefits have fallen behind inflation this year, leaving many retired Americans in a difficult position. In fact, more than seven in 10 retirees rank rising prices as their biggest financial concern right now, according to Goldman Sachs.

Fortunately, Social Security benefits are adjusted for inflation on an annual basis, and recipients will get a historic 8.7% cost-of-living adjustment in 2023. That is largest COLA enacted in more than four decades and the fourth-largest COLA in history. Generally speaking, that is a positive development for retired workers, though there are a few caveats.

Heres the good, the bad, and the ugly news related to Social Securitys 2023 COLA.

Image source: Getty Images.

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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%

State Taxes On Social Security

13 States That Tax Social Security Benefits (With images)

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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Other Things To Watch Out For

While everyone likes to minimize their taxes, especially ones that you can avoid without too much legwork, its important that you keep things in perspective.

Tax strategy should be part of your overall financial planning, says Crane. Dont let tax strategy be the tail that wags the dog.

In other words, make the financial moves that maximize your after-tax income, but dont make minimizing taxes your only goal. After all, those who earn no income also pay no taxes but earning no income is not a sensible financial path. For example, it can be better to find ways to maximize your Social Security benefits rather than minimizing your taxes.

And it could be financially smart to first avoid some of the biggest Social Security blunders.

Dont forget that these rules apply to minimizing your tax at the federal level, but your state may tax your Social Security benefit. The laws differ by state, so its important to investigate how your state treats Social Security.

There really arent any tricks, you just have to be careful with your interest and dividends, says Paul Miller, CPA, of Miller & Company in the New York City area.

Watch For These 5 Changes To Social Security In 2023

More than 70 million people depend on one of Social Securitys benefit programs, so annual changes to the program and its payouts are always highly anticipated. But substantially higher benefit checks have been a rarity in recent years. With inflation soaring in 2022, the extra money will help seniors and others make ends meet.

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Social Security Benefit Changes Coming In 2023 Will Help Retirees

President Joe Biden speaks about his administration’s plans to lower prescription drug costs and protect Social Security and Medicare, Saturday, Nov. 5, 2022, at Jones Elementary School in Joliet, Ill.

Inflation has been sky-high over the last year, so its a good thing that the Social Security Administration is boosting its cost of living adjustment for benefit checks in 2023. Its just one of many changes announced by Social Security recently.

Here are some key changes to Social Security that are happening next year:

Cost of living adjustment rises. The Social Security Administration has announced that benefit checks will rise 8.7 percent in 2023. The 8.7 percent adjustment will amount to a $146 increase in monthly benefits for the average retired worker on Social Security, beginning in January. Specifically, the average check for retired workers will increase from $1,681 to $1,827.

Maximum taxable earnings going up. In 2022, the maximum earnings subject to Social Security taxes was $147,000. In 2023, the maximum earnings will increase to $160,200, meaning more of a workers income will be subject to the tax.

Maximum Social Security benefit also set to increase. The maximum Social Security benefit for a worker retiring at full retirement age will also increase in 2023, from $3,345 to $3,627. This maximum applies to those retiring at the full retirement age, which is 67 for anyone born after 1960.

Of course, those are averages, and individual circumstances will vary.

Is Social Security Based On The Last 5 Years Of Work

Good Question: Why Are Social Security Benefits Taxed?

A: Your Social Security payment is based on your best 35 years of work. And, whether we like it or not, if you dont have 35 years of work, the Social Security Administration still uses 35 years and posts zeros for the missing years, says Andy Landis, author of Social Security: The Inside Story, 2016 Edition.

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How Much Of Your Social Security Income Is Taxable

Social Security payments have been subject to taxation above certain income limits since 1983. No inflation adjustments have been made to those limits since then, so most people who receive Social Security benefits and have other sources of income pay some taxes on the benefits.

However, regardless of income, no taxpayer has all their Social Security benefits taxed. The top level is 85% of the total benefit. Heres how the Internal Revenue Service calculates how much is taxable:

  • The calculation begins with your adjusted gross income from Social Security and all other sources. That may include wages, self-employed earnings, interest, dividends, required minimum distributions from qualified retirement accounts, and other taxable income.
  • Tax-exempt interest is then added.
  • If that total exceeds the minimum taxable levels, then at least half of your Social Security benefits will be considered taxable income. You must then take the standard or itemize deductions to arrive at your net income. The amount you owe depends on precisely where that number lands in the federal income tax tables.

Combined Income = Adjusted Gross Income + Nontaxable Interest + Half of Your Social Security Benefits

The key to reducing taxes on your Social Security benefit is to reduce the amount of taxable income you have when you retire, but not to reduce your total income.

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