Will You Owe Taxes On Your Social Security Benefits
As with most questions about taxes, the answer is “it depends.”
About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration . That’s because their income in retirement exceeds limits set by tax rules and regulations.
Generally, if Social Security is your only retirement income, you won’t have to pay taxes on it. But if you have at least moderate income, you’ll most likely owe the government some money.
The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it’s never 100%. That’s considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.
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.
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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If Social Security Is Your Only Income
You almost certainly wont have to pay federal income tax on your Social Security benefits if they are your only source of income. That means your Social Security income probably isnt taxable if you never got around to investing in a 401, if you dont rent out a property for profit, or if youve given up working entirely. These are just examplesthe point is that you have no other form of income from any source.
In some cases, this might mean you dont even have to file a tax return. You should always check with a tax professional, though, before you skip filing altogether.
How Social Security Benefits Are Taxed
In order to determine the taxability of Social Security benefits, it’s first necessary to calculate “provisional income” – a measurement of income used specifically for these purposes. Provisional income is calculated as your total income from taxable sources , plus any tax-exempt interest and excluded foreign income, plus one half of your Social Security benefits. If this total exceeds $25,000 for individuals , then 50% of the excess is the amount of Social Security benefits that must be included in income. If provisional income exceeds $34,000 for individuals , then 85% of the excess amount is included in income. Some examples may help to illustrate:
The bottom line: as income rises, more Social Security benefits are subject to taxation, until eventually a maximum of 85% of all benefits are included in income for tax purposes!
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Withdraw Taxable Income Before Retirement
Another way to minimize your taxable income when drawing Social Security is to maximize, or at least increase, your taxable income in the years before you begin to receive benefits.
You could be in your peak earning years between ages 59½ and retirement age. Take a chunk of money out of your retirement account and pay the taxes on it. Then, you can use it later without pushing up your taxable income.
This means you could withdraw funds a little earlyor take distributions, in tax jargonfrom your tax-sheltered retirement accounts, such as IRAs and 401s. You can make penalty-free distributions after age 59½. This means you avoid being dinged for making these withdrawals too early, but you must still pay income tax on the amount you withdraw.
Since the withdrawals are taxable , they must be planned carefully with an eye on the other taxes you will pay that year. The goal is to pay less tax by making more withdrawals during this preSocial Security period than you would after you begin to draw benefits. That requires considering the total tax bite from withdrawals, Social Security benefits, and other sources. Be mindful, too, that at age 72, youre required to take RMDs from these accounts, so you need to plan for those mandatory withdrawals.
Is Social Security Disability Taxable
You may need to pay taxes on your Social Security Disability Insurance benefits. This can happen if you receive other income that places you above a certain threshold. But, because SSDI requires you to be disabled and have limited income to be eligible, you might not have other income to exceed this threshold.
Common examples for when your Social Security Disability Insurance benefits may be taxable are if you receive income from other sources, such as dividends or tax-exempt interest, or if your spouse earns income. If this describes your situation, you will need to know the thresholds for when your SSDI becomes taxable.
The IRS states that your SSDI benefits may become taxable when one-half of your benefits, plus all other income, exceeds an income threshold based on your tax filing status:
- Single, head of household, qualifying widow, and married filing separately taxpayers: $25,000
For example, if you are married and file jointly, you can report up to $32,000 of income before needing to pay taxes on your SSDI benefits. If you earn more than these limits for these tax filing statuses, you have two different benefit inclusion rates that can apply.
For 2022:
- As a single filer, you may need to include up to 50% of your benefits in your taxable income if your income falls between $25,000 and $34,000.
- Up to 85% gets included on your tax return if your income exceeds $34,000.
For married couples who file jointly, youd pay taxes:
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The above article is intended to provide generalized financial information designed to educate a broad segment of the public it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.
What Percentage Of Social Security Benefits Are Taxable
The share of your benefits that are taxable depends on your filing status, adjusted income and the Social Security Administrations income minimums that trigger taxes.
None of your benefits are taxable if you earn less than the threshold amount for your filing status. But 50% of your Social Security benefits me be taxable if the following applies:
- Single filers: Your income is between $25,000 and $34,000
- Joint married filers: Your income is between $32,000 and $44,000
Lets say youre a single filer who received $30,000 from Social Security benefits and had no other income. Because your income falls between the $25,000 and $34,000 guideposts for a single filer, 50% of your Social Security benefits$15,000may be subject to tax.
And 85% of your benefits are taxable in the following instances:
- Single filers: Your income exceeds $34,000
- Joint married filers: Your income exceeds $44,000
So if youre a single filer who received $35,000 from Social Security and had no other income, then 85% of your Social Security benefits$29,750could be taxed.
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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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Social Security Cheat Sheet 202: Got Benefits Questions We’ve Got Answers
Learn more about your Social Security, Supplemental Security Income or Social Security Disability Insurance benefits, and get answers to your questions right here.
The end of 2022 brings an 8.7% cost of living adjustment to the roughly 66 million Americans who receive Social Security benefits. Social Security beneficiaries can look forward to their 2023 payment amounts increasing starting in January, while Supplemental Security Income recipients will get their first increased check in late December.
To help guide you through some of the ins and outs of Social Security — from when you should sign up to when you should look for your checks — CNET has created this cheat sheet, which is regularly updated so you can stay on top of the latest details.
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How To File Social Security Income On Your Federal Taxes
Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.
Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.
How Social Security Disability Works
President Franklin Roosevelt included the Social Security program as part of his New Deal government reforms of the 1930s. The purpose of the New Deal was to lift the country out of the Great Depression and restore its economy. Social Security was designed to provide a financial safety net for older Americans and those with qualifying disabilities.
Most people who receive Social Security disability benefits fall into the former category. They have reached at least the minimum retirement age of 62 and have filed to receive monthly benefits based on the money they paid into the system during their working years.
People who receive Social Security benefits due to a disability do not have to be of a particular age to receive benefits . Instead, their disability must meet the strict criteria laid out by the Social Security Administration .
First, the SSA says, “Your condition must significantly limit your ability to do basic work such as lifting, standing, walking, sitting, and rememberingfor at least 12 months.” The condition must prevent you from doing the kind of work you did previously, and based on your age, education, experience, and transferable skills, you are unable to perform other work.
Additionally, you must not currently be working or working so little that your monthly income is under $1,310 in 2021 . The specific type of disability must be included on the SSA’s approved list or otherwise judged to be of equal severity to a condition on the list.
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Change Is Always Possible
Its not hard to understand why the solvency of Social Security has been the center of a growing national debate over the past few years. Its simple economics.
More people are retiring than entering the workforce, which will eventually reduce the ratio of workers to retirees to 2-to-1 . In addition, people are living much longer in retirement, sometimes decades longer.
Under the pressure of possible insolvency, Congress has debated several Social Security reform measures in recent years. While no new legislation has been passed, the possibility continues to exist for dramatic revisions to this social insurance system to come about in the future, changing how Social Security factors into your retirement planning.
To learn more about your benefits, visit the Social Security website at www.ssa.gov.
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How Social Security Taxes Work
The fact that levies are applied to benefits is “extremely unpopular,” Altman said. “People hate it, but it actually makes policy sense,” she said.
One key reason that it makes for good policy is that Social Security benefits and private pensions are taxed in a similar way.
When the program was created in 1935, benefits were not taxed. That began to change in 1983, when Congress changed the rules so that up to 50% of Social Security benefits could be included in taxable income, if a taxpayer’s income was over certain thresholds.
More changes came in 1993, which raised the portion of certain Social Security benefits subject to taxation to 85%. That change applied to higher income beneficiaries.
The result is a complicated set of rules that still applies today.
First, the taxes are based on what is known as provisional or combined income. That includes half of your Social Security benefits plus your adjusted gross income and nontaxable interest. That means that any income from wages, interest, dividends or other taxable income is counted.
Then the 50% and 85% thresholds are applied.
Individuals with combined income between $25,000 and $34,000 will pay income tax on up to 50% of their benefits. That also goes for couples with incomes between $32,000 and $44,000.
Individuals with combined income of more than $34,000, as well as couples with more than $44,000, may pay tax on up to 85% of their benefits.
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How To Find Out If You Have To Pay Tax
Each January, you should get a Social Security benefit statement showing the amount of benefits you received in the previous year.
You can use this benefit statement when you complete your federal income tax return to find out if your welfare payments are subject to tax.
If you haven’t received it, or if you’ve misplaced it, you can order a new one by using your online Social Security account.
To get a replacement form, simply select the “Replacement Documents” tab and follow the instructions.
If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS.
Alternatively, you may choose to have federal taxes withheld from your benefits when you first apply.
You can have either 7%, 10%, 12%, or 22% of your monthly benefit withheld for taxes.
When Is Social Security Income Taxable
To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.
Youll see that you fall into one of three categories. If your total income is:
- Below the base amount, your Social Security benefits are not taxable.
- Between the base and maximum amount, your Social Security income is taxable up to 50%.
- Above the maximum amount, your Social Security benefits are taxable up to 85%.
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Increasing Payroll Taxes Would Strengthen Social Security
Social Security faces a significant though manageable long-term funding shortfall, which policymakers should address primarily by increasing Social Securitys tax revenues. If policymakers elect to reduce Social Security benefits, those cuts will need to be limited and carefully targeted to avoid causing significant hardship. Moreover, the cuts will almost certainly be phased in slowly, which means they could not produce significant savings for many years. Increasing Social Securitys revenues will be necessary.
Social Securitys tax base has eroded since the last time policymakers addressed solvency.Boosting Social Securitys payroll tax revenue also is justified by recent trends: Social Securitys tax base has eroded since the last time policymakers addressed solvency in 1983, largely due to increased inequality and the rising cost of non-taxed fringe benefits, such as health insurance. And it enjoys broad support: the majority of Americans oppose cuts to Social Security and support strengthening the program by contributing more in taxes.
This paper presents three approaches to increasing payroll taxes that would improve the programs solvency: