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.
Delaying Your Social Security Benefit Claim
“The other strategy, says Kumar, involves postponing when you first take Social Security. Both approaches can help shave dollars off your tax bill in retirement every yearit just takes a little forward planning.”
Consider a hypothetical couple named Natalie and Juan: For every year they delay taking Social Security past their full retirement age , they get up to an 8% increase in their annual benefit.
A hypothetical couple claiming Social Security at age 65 vs. age 70
|Natalie and Juan
|Net tax savings
In general, many people would benefit from waiting to age 70 to take Social Security. Others may need the income sooner and may lack the resources necessary to meet expenses during the delay period, or they may not live long enough to reap the rewards of delaying their claim.
Natalie and Juans strategy is to reduce the amount they withdraw from their taxable IRAs over time and make up the difference in income by waiting until age 70 to claim Social Security. This has a big payoff for them because by delaying claiming Social Security until age 70, the percentage of their Social Security income that gets taxed is cut from 85% to 48.33%.
It gets better: While Natalie and Juans retirement paycheck of $70,000 remains the same, they pay approximately 37% less in taxes and withdraw smaller amounts from their respective IRAs each year.
Tip: To learn more about timing and Social Security, read Viewpoints on Fidelity.com: Should you take Social Security at 62?
Is Social Security Taxed After Age 70
After age 70, there is no longer any increase, so you should claim your benefits then even if they will be partly subject to income tax. … Your earnings are not subject to any tax if you hold the account at least five years and are over 59.5 years old. If you have a traditional IRA, you can convert it into a Roth IRA.
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Calculating Fica Taxes: An Example
An employee who makes $165,240 a year collects semi-monthly paychecks of $6,885 before taxes and any retirement-plan withholding. Though Medicare tax is due on the entire salary, only the first $147,000 is subject to the Social Security tax for 2022. Since $147,000 divided by $6,885 is 21.3, this threshold is reached after the 22nd paycheck.
For the first 21 pay periods, therefore, the total FICA tax withholding is equal to + , or $526.70. Only the Medicare HI tax is applicable to the remaining three pay periods, so the withholding is reduced to $6,885 x 1.45%, or $99.83. In total, the employee pays $8,964.27 to Social Security and $2,395.98 to Medicare each year. Though it does not affect the employee’s take-home pay, the employer must contribute the same amount to both programs.
As mentioned above, those who are self-employed are considered both the employer and the employee for tax purposes, meaning they are liable for both contributions. In the example above, a self-employed person with the same salary pays $17,928.54 to Social Security and $4,791.96 to Medicare.
How Is Social Security Financed
Social Security is financed through a dedicated payroll tax. Employers and employees each pay 6.2 percent of wages up to the taxable maximum of $147,000 , while the self-employed pay 12.4 percent.
In 2021, $980.06 billion of total Old-Age and Survivors Insurance and Disability Insurance income came from payroll taxes. The remainder was provided by interest earnings $70.1 billion and revenue from taxation of OASDI benefits $37.6 billion .
The payroll tax rates are set by law, and for OASI and DI, apply to earnings up to a certain amount. This amount, called the earnings base, rises as average wages increase.
Tax rates for employees and employers each under current law
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Social Security Tax Rates
The Social Security program provides benefits to retirees and those who are otherwise unable to work due to disease or disability. Social Security often provides the only source of consistent income for people who can no longer workespecially for those with modest earnings histories.
Because Social Security is a government program aimed at providing a safety net for working citizens, it is funded through a simple withholding tax that deducts a set percentage of pretax income from each paycheck. Workers who contribute for a minimum of 10 years are eligible to collect benefits based on their earnings history once they retire or suffer a disability.
Social Security benefits are capped at a maximum monthly benefit amount based on earnings history. To prevent workers from paying more in taxes than they can later receive in benefits, there is a limit on the amount of annual wages or earned income subject to taxation, called a tax cap.
For 2022, the maximum amount of income subject to the OASDI tax is $147,000, capping the maximum annual employee contribution at $9,114. For 2023, the maximum amount of income subject to the tax is $160,200, capping the maximum annual employee contribution at $9,932.40. The amount is set by Congress and can change from year to year.
Taxes On Disability Income
In the U.S., if you work long enough, pay your taxes, and meet certain income thresholds during your career, you can participate in Social Security programs. Over time, you pay into this system and can expect to receive several benefits for you and your family.
If you work but later become disabled and have limited resources and means to earn income, the Social Security Disability Insurance program can assist. The program pays benefits to you and your children. But because your taxes fund this program, you may wonder is Social Security disability income taxable? Let’s find out.
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Social Security Provides Support To Tens Millions Every Year But Some Recipients Could Be On The Hook For Income Taxes On A Portion Of Their Benefits
Prior to 1984, Social Security benefits were not taxed. However, to kept the Trust Fund that supports the program solvent, bipartisan legislation was passed to tax a portion of payments to seniors citizens, surviving spouses and the disabled if they had income above certain thresholds.
At the onset, less than one in ten beneficiaries paid income tax on their benefits. But that percentage has risen over time since unlike benefits the thresholds were not indexed to inflation and in the intervening four decades no inflation adjustments have been made. This meant that as benefits rose, more recipients crossed over the thresholds. Now 56 percent of beneficiaries pay income tax on a portion of their benefits, sometimes as much as 85% if their total income exceeds upper thresholds.
There is no age at which you will no longer be taxed on Social Security payments. However once you are at full retirement age your Social Security payments can no longer be withheld if, when combined with your other forms of income, they exceed the maximum threshold.
Income Taxes And Your Social Security Benefit
Some of you have to pay federal income taxes on your Social Security benefits. This usually happens only if you have other substantial income in addition to your benefits .
You will pay tax on only 85 percent of your Social Security benefits, based on Internal Revenue Service rules. If you:
- file a federal tax return as an “individual” and your combined income* is
- between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
- more than $34,000, up to 85 percent of your benefits may be taxable.
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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.
Is Social Security Taxable
Yes, Social Security may be taxable. But the portion of benefits that are taxed depends on a person’s filing status and provisional income.
There are two steps in determining whether your Social Security benefits are taxable and at what rate:
Provisional income for a single, head of household, qualifying widow, or married but separate filer
Provisional income for a married, joint filer
Amount of Social Security benefit taxed
More than $44,000
Up to 85% of Social Security benefit taxed at filer’s marginal tax rate
Note: Married couples who file taxes separately but lived together at any time during the tax year are taxed on up to 85% of their Social Security benefits regardless of their income level.
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The Tax Is Also Subject To An Income Cap
The Old-Age, Survivors, and Disability Insurance program taxmore commonly called the Social Security taxis calculated by taking a set percentage of your income from each paycheck. Social Security tax rates are determined by law each year and apply to both employees and employers.
The Social Security tax rate for employees and employers is 6.2% of employee compensation, for a total of 12.4%. Those who are self-employed are liable for the full 12.4%.
The combined taxes withheld for Social Security and Medicare are referred to as the Federal Insurance Contributions Act . On your pay statement, Social Security taxes are referred to as OASDI, and Medicare is shown as Fed Med/EE. Both Social Security and Medicare are federal programs that provide benefits for retirees, people with disabilities, and children of deceased workers.
When Do You Get Back The Withheld Money
The money withheld from your benefits because you worked before FRA does not disappear forever. You can eventually get it back provided you live long enough.
When you have some of your Social Security benefits withheld, the SSA will give you credit for those months and will recalculate your new higher monthly benefit once you hit FRA. Heres how this works:
- When you claim benefits before FRA, youre subject to an early filing penalty of 5/9 of 1% per month for each of the first 36 months you file prior to FRA. Youre also subject to an additional 5/12 of 1% early filing penalty for each additional month prior to 36 months that you claim benefits before FRA.
- This penalty is applied to reduce your primary insurance amount, which is the standard benefit youd receive at full retirement age . Your PIA is based on an average wage earned over the 35-years in your career when your inflation-adjusted income was highest .
- When you hit FRA, if you filed early but your benefit check was withheld in some months due to earning too much, the SSA will eliminate the early filing penalty for these months. This causes an increase in your monthly checks.
Since your PIA is adjusted upward by just $77 per month, it will take you awhile to make up for 10 months of having $1,400 benefits withheld . In fact, it will take you just over 15 years to get back the benefits you didnt receive due to working while receiving Social Security income.
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Calculator: How Much Of My Social Security Benefits Is Taxable
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.
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
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How Much Money Can I Earn Before My Social Security Is Taxable
When you receive your Social Security benefits, you do not have to pay FICA taxes on the amount you receive, but you may have to include the benefits as part of your taxable income for the year when you file your federal income tax return. Knowing how much you can make before having to pay taxes helps you plan your income for the year to avoid the taxes or to budget for the income taxes on your benefits.
Example Of Social Security Taxation
Let’s say a single, 68-year-old retired woman, Susan, receives a Social Security benefit totaling $18,000.
Susan collected $30,000 from other means throughout the year, so her provisional income is $39,000 .
Then, 85% of Susan’s total Social Security benefit, $15,300, is subject to federal income tax.
If you collect Social Security and anticipate you’ll need to pay federal taxes on your benefit, you can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of your monthly benefit. You can also have additional taxes withheld from your other income sources, such as a pension.
Important: The following states also tax federal Social Security benefits, according to AARP: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah, Vermont, and West Virginia.
Social Security benefits for retirees, beneficiaries, and disabled people are considered a form of income by the IRS. But only a portion is subject to taxation 15% of your total benefit for the year is always tax-free.
If your income for the year is more than $34,000, or more than $44,000 if you’re married, then you can expect to pay income taxes on most of the benefits you collected.
If you’d prefer to pay taxes as you go to avoid a large bill during tax season, opt in to withholding by filling out the form and returning it to your local Social Security office by mail or in person.
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Uncertainty About The Budgetary Effects
The estimates for this option are uncertain primarily because of uncertainty surrounding CBO’s underlying projections of income subject to Social Security payroll taxes. Those projections rely on CBO’s projections of the economy over the next decadeparticularly projections of wages, income distribution, and employmentwhich are inherently uncertain. However, CBO’s projections of wages are typically less variable than its projections of other sources of income, such as capital gains realizations or corporate profits.