How The Math Works
The math works like this:
- If your wages were less than $137,700 in 2020, multiply your earnings by 6.2% to arrive at the amount you and your employer must each pay for a total of 12.4%. If you were self-employed, multiply your earnings up to this limit by 12.4% to calculate the Social Security portion of your self-employment tax.
- If your wages were more than $137,700 in 2020, multiply $137,700 by 6.2% to arrive at the amount you and your employer must each pay. Anything you earned over this threshold is exempt from Social Security tax. You would do the same but multiply by 12.4% if you’re self-employed.
For taxes due in 2021, refer to the Social Security income maximum of $137,700 as you’re filing for the 2020 tax year.
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.
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.
No taxpayer, regardless of income, has all of 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 any 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 then have to take the standard deduction or itemize deductions to arrive at your net income. The amount that you owe depends on precisely where that number lands in the federal income tax tables.
Combined Income = your adjusted gross income + nontaxable interest + half of your Social Security benefits
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State Taxes On Social Security Benefits
Everything weve discussed above is about your federal income taxes. Depending on where you live, you may also have to pay state income taxes.
There are 12 states that collect taxes on at least some Social Security income. Two of those states follow the same taxation rules as the federal government. So if you live in one of those two states then you will pay the states regular income tax rates on all of your taxable benefits .
The other states also follow the federal rules but offer deductions or exemptions based on your age or income. So in those nine states, you likely wont pay tax on the full taxable amount.
The other 38 states do not tax Social Security income.
|State Taxes on Social Security Benefits|
|Taxed According to Federal Rules||Minnesota, Utah|
What Does Social Security Tax Pay For
The Social Security tax funds the Social Security program, otherwise known as the Old-Age, Survivors, and Disability Insurance program.
This program provides a fixed income for certain vulnerable populations. Most notably this provides a retirement fund for people of retirement age. However, in addition, the Social Security program also provides benefits for people with certain disabilities, and for some widows and widowers.
While the federal income tax goes into a general fund that can be spent however Congress deems fit, the Social Security tax is a dedicated tax. Its revenue can only be spent to distribute benefits under the Social Security program.
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How Much Is Social Security Taxed At Full Retirement Age
Even if you work past full retirement age, you still have to make applicable Social Security contributions on your income. However, if you work past full retirement age, you can increase the amount of Social Security Benefits you receive.
Once you start receiving Social Security benefits, your income will determine if you pay income tax on part of your Social Security income. For more information, refer to question #2: How Much Social Security Income Is Taxable?
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.
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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.
Is Social Security Taxed After Age 70
Social Security may continue to be taxed after you reach the age of 70 if you fit the thresholds set forth by the IRS regarding the amount of Social Security benefits that are taxable. Regardless of your age, the thresholds set forth by the IRS do not change. This means that depending on how you file your taxes you may be called to pay further taxes on your social security benefits. This in part is done in cases where the income earned through other sources is the one mainly used to sustain your life, rather than using the Social Security benefits as your predominant income source.
For Single Filers:
- For a combined income that ranges between $25,000 and $34,000 you will be called to pay taxes on 50% of your Social Security benefits
- For a combined income that is higher than $34,000 then you will need to pay taxes on 85% of your Social Security benefits
For Joint Filers:
- For a combined income that ranges between $32,000 and $44,000 you will be called to pay taxes on 50% of your Social Security benefits
- For a combined income that is higher than $44,000 then you will need to pay taxes on 85% of your Social Security benefits
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How Much Of My Social Security Is Taxable In 2022
As of 2022, the social security tax rate is divided equally between the employer and the employee. Each one of these two parties is obliged to pay 6.2% for the Social Security tax. The Social Security tax limit is revaluated each year and the Social Security tax limit 2022 specifically will be up to $147,000. This means that the taxable social security was increased from what it previously was set at, which was $142,800. This further means that the maximum Social Security tax any employee will be called to pay from their pay check is $9,114.
Social Security Is Pay
Any excess money that the Social Security tax generates beyond what is needed to pay benefits goes into the programs trust fund. Congress cannot spend this money for any purpose other than the Social Security program.
This has created some confusion. Many people believe that Social Security works similarly to a retirement fund. They paid the Social Security tax during their working years, and upon retirement are entitled to the benefits.
This has never been the case. Social Security does not set aside money to distribute later unless it runs overages. It pays all benefits with the taxes that current workers pay into it today. In the years to come, when those workers retire, new tax payments will fund their own Social Security payments.
In part, this is because generally, retirees collect far more from the Social Security program than they pay into it. While estimates vary, many economists suggest that the average retiree collects anywhere from $1.50 to $7 for every $1 paid in Social Security taxes during their working years.
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If You Earn Enough Money For Your Benefits To Be Taxable You Could End Up Paying The Highest Income Taxes In The Country
Social Security benefits are tax free unless you earn too much income during the year. To know whether you might be subject to such taxes you have to figure your “combined income.” This is actually quite easy: Simply add one-half of the total Social Security you received during the year to all your other income, including any tax-exempt interest .
You’ll have to pay tax on part of your benefits if your combined income exceeds these thresholds:
- $32,000 if you’re married and file a joint tax return , or
- $25,000 if you’re single.
If a married couple files their taxes separately, the threshold is reduced to zerothey always have to pay taxes on their benefits. The only exception is if they did not live together at any time during the year in this event the $25,000 threshold applies.
This applies to all types of Social Security benefits: disability, retirement, dependents, and survivors benefits.
How much of your Social Security benefits will be taxed depends on just how high your combined income is.
Individual filers. If you file a federal tax return as an individual and your combined income is between $25,000 and $34,000, you have to pay income tax on up to 50% of your Social Security benefits. If your income is above $34,000, up to 85% of your Social Security benefits is subject to income tax.
Once you start receiving Social Security benefits, to keep your income below the applicable threshold, or at least as low as possible, you should:
Are Social Security Benefits Taxed After Age 66
Yes, Social Security benefits may still be taxed after age 66. Whether any of your benefits will be taxed by the IRS does not depend on your age. It depends on your filing status and total income. If your income is above the threshold limit, then youll owe taxes on up to 85% of your benefit amount.
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How Much Is Taxable
Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.
- The total of one-half of the benefits and all other income is more than $34,000 .
- You are filing Married Filing Separately and lived with your spouse at any time during the year.
Who is taxed. Benefits are included in the taxable income for the person who has the legal right to receive the benefits.
Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher, age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion of the benefits received, Lisa uses only the amount paid for her benefit.
The amounts paid for Christopher and Michelle must be added to each childâs other income to see whether any of those benefits are taxable to either of the children.
Withholding. You can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Request.
Who’s Eligible For Social Security Disability Insurance
To qualify for Social Security Disability Insurance, you must meet certain conditions.
First, you must meet a recent work test. This means earning at least a minimum amount per calendar quarter and working long enough. For each quarter you work and earn at least $1,470 , you receive one Social Security credit.
Meeting the recent work test requirement depends on your age. It also requires different amounts of Social Security credits.
- Under age 24: You meet the recent 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 for 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 work test based on your age and when your disability began.
Third, you must be unable to work because of a medical condition that has lasted a year, is expected to last at least one year, or is expected to result in death. This means not having a partial disability and meeting the Social Security Administration’s definition of disabled.
Fourth, you must be younger than your full retirement age as defined by Social Security.
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Understanding State Taxes On Social Security Benefits
So far, weve only been discussing the implications of federal income tax. But depending on the state in which you reside, you might be required to pay state taxes on your benefits as well. The majority of states do not tax your Social Security benefits. However, some states tax these benefits following the Federal tax guidelines and others tax them based on their own state-specific rules.
States that follow the Federal tax rules: Vermont, West Virginia, Minnesota, North Dakota. West Virginia has recently begun to phase out state taxation of SS benefits. As of 2021, most residents in the state will now owe any taxes on their benefits.
States that partially tax SS benefits: Kansas, Connecticut, Colorado, Montana, Nebraska, Missouri, Rhode Island, Utah, New Mexico. These states tax benefits at varying levels. You might be entitled to exemptions based on your age and income level in these states. You should contact a tax professional or consult your states specific rules for determining how much tax you will owe if you reside in one of these states.
The remaining 37 states do not place a state income tax on your Social Security benefits at all. You might still owe state taxes on distributions or retirement benefits from your private retirement accounts or other income, but no state taxes will be due on your Social Security benefits.
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.
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What Is The Taxable Income Limit For Social Security
Weve already learned the answer to the question, Do you pay taxes on Social Security? So, what is the highest amount that you will be taxed on? The taxable income limit for Social Security is 85%. Even at the highest income level, no more than 85% of your Social Security income will be considered taxable income. Therefore, you will always have at least 15% of your benefits that you will not be required to pay tax on.
Overpayment Of Part Xiii Tax
If excess Part XIII tax was withheld based on the revised rates provided above, you can apply for a refund by submitting Form NR7-R, Application for Refund of Non-Resident Part XIII Tax Withheld. Complete and send us this form no later than two years after the end of the calendar year in which the payer sent us the tax. For example, for excess tax withheld on your social security benefits during 2008, you have to send us Form NR7-R by December 31, 2010. To claim a refund of the excess tax withheld on benefits you received during the 2009 calendar year, send us form NR7-R by December 31, 2011.
Note Do not submit Form NR7-R for the 2009 tax year if you are filing a 2009 income tax return with an election under Section 217 of the Income Tax Act. The revised rates will be considered when we process your return.
If you previously received a Notice of Assessment for Part XIII tax payable on your social security benefits under a tax treaty with a country mentioned above, an adjustment may be required to your assessment. Please contact the International Tax Services Office.