Monday, May 16, 2022

How Much Of Your Social Security Income Is Taxable

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Income Taxes: Social Security Federal Income Tax

These programs all follow the same general rules as the Social Security program for retirees, with one exception: Supplemental Security Income, or SSI for short, is not a Social Security program. It’s a separate program for people who are needy and disabled people, and payments from it are not taxable.

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.
  • file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $44,000, up to 85 percent of your benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.
  • How To File Social Security Income Tax

    Next, you need to learn how to file taxes with Social Security income. You can file taxes by following these steps:

  • Fill out form 1040: Social Security benefits are reported in Box 5 of Form SSA-1099, where you enter that amount on line 5a of Form 1040 U.S. Individual Income Tax Return or Form 1040-SR U.S. Tax Return for Seniors.
  • Its wise to pay taxes throughout the year. You can do so by withholding income tax from your Social Security benefits, making quarterly estimated tax payments or paying a lump sum.
  • If you decide to withhold: Fill out the Voluntary Withholding Request form and choose if you want 7%, 10%, 12% or 22% of your benefits withheld.
  • If you decide to make quarterly payments: To make quarterly estimated tax payments, you can send your payments by mail, online or over the phone.
  • If you decide to pay a lump sum: Youll pay your income taxes on your Social Security benefits when you file your return in April. However, if you owe money, you may be charged a penalty.
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    How To Determine If Social Security Benefits Are Taxable

    Seniors whose only source of income is Social Security do not have to pay federal income taxes on their benefits. If they receive other sources of income, including tax-exempt interest;income, they must add one-half of their annual Social Security benefits to their other income and then compare the result to a threshold set by the IRS. If the total is more than the IRS threshold, some of their Social Security benefits are taxable.

    For 2020, the threshold amount is $25,000 for singles and $32,000 for married couples filing jointly. Married couples who live together but file separately have a threshold of $0 and must pay taxes on Social Security benefits regardless of other income earned.

    The formula for calculating your combined income includes adding your adjusted gross income plus nontaxable interest plus half of your Social Security benefits. Your other income, which is included in adjusted gross income, can come from a part-time job or 401 withdrawals.;

    More specifically, Social Security benefits are taxed as follows:;

    • Up to 50% of Social Security benefits are taxed on income from $25,000 to $34,000 for individuals or $32,000 to $44,000 for married couples filing jointly.;
    • Up to 85% of benefits are taxable if the income level is over $34,000 for individuals or $44,000 for couples.;

    History Of Social Security Tax Rates

    Social Security Tax Table 2018

    The Social Security tax began in 1937. At that time, the employee rate was 1%. It has steadily risen over the years, reaching 3% in 1960 and 5% in 1978. In 1990, the employee portion increased from 6.06 to 6.2% but has held steady ever sincewith the exception of 2011 and 2012.

    The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 reduced the contribution percentage to 4.2% for employees for those years; employers were still required to pay the full amount of their contributions.

    The tax cap has existed since the inception of the program in 1937 and remained at $3,000 until the Social Security Amendments Act of 1950. It was then raised to $3,600 with expanded benefits and coverage. Additional increases in the tax cap in 1955, 1959, and 1965 were designed to address the difference in benefits between low-wage and high-wage earners.

    The Social Security tax policy in the 1970s saw a number of proposed amendments and re-evaluations. The Nixon Administration was paramount in arguing that tax cap increases needed to correlate with changes in the national average wage index in order to address benefit levels for individuals in different tax brackets. The 1972 Social Security Amendments Act had to be revamped due to problems with the benefits formula that caused financing concerns. A 1977 amendment resolved the financial shortfall and established a tax cap increase structure that correlated with average wage increases.

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    How The Earnings Limit Is Applied

    The most confusing part of the benefit reduction due to income is how its reflected in your monthly benefits deposits. Instead of taking out a little bit every month, the SSA will withhold several months of benefits at a time.

    If you predict in advance that you will have excess earnings and report this to the Social Security Administration, they may take a few months of benefits before you actually earn the anticipated excess earnings.

    For example, if your Social Security payment is $1,667 per month, and you expect to receive $28,960 in wages from your job, the Administration would calculate that youll be over your earnings limit by $10,000 and thus $5,000 in benefits should be withheld. So, they would withhold your benefit payment from January to March. In April, your checks would resume.;

    If you dont report excess income before you earn it, then you have to report this information after the fact. You can do this when you file your income tax return, but the preferred method is to be proactive and call your local Social Security Administration office.

    If you wait for the Social Security Administration to learn of your excess earnings via your tax return, there could be a significant gap between the time you earn the excess income and the time that they withhold your benefits. In most cases, its better to report the excess earnings quickly so the benefits reduction occurs closer to the time you actually earn that extra income.

    What Is Supplemental Security Income

    Social Security Disability Insurance benefits and SSI benefits differ based on who receives them and why. SSI recipients do not need to meet the same disability or work credit requirements like those who receive Social Security Disability Insurance benefits.

    Generally, SSI payments go to the elderly, blind, or disabled. Also, SSI benefit recipients often qualify for Medicaid assistance automatically.

    Dont worry about knowing all the details when it comes to tax time. TurboTax will ask you simple questions about your life and help you fill out the right forms. Well also help you uncover the deductions and credits you qualify for so you can get every dollar you deserve. From simple to complex tax situations, weve got you covered.

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    What Is The Net Investment Income Tax

    If youre someone with substantial investment income including capital gains passive income, certain annuities, dividends, interest, rents, and royalties you may have to pay an additional tax that goes toward supporting Americas healthcare program.

    The;Net Investment Income Tax;applies a flat rate of 3.8% to your investment income if your adjusted gross income is above the following amounts for your filing status:

    • Single and head of household: $200,000 or more

    Federal Taxes On Social Security

    Taxable Social Security Benefits | Income Tax Course | CPA Exam Regulation

    If you think calculating your Michigan state income taxes is difficult, you havent seen anything yet. ;Dust off the old calculator because we need to do some math. ;The good news about social security is that at least 15% of your benefit will be completely tax-free, and if your combined income is low enough, your whole benefit is 100% tax-free. ;

    First, we need to figure out your combined income. ;Never heard of combined income before? ;Thats ok, basically, no one has. ;From the Social Security Administration: ;;

    Your adjusted gross income

    + Nontaxable interest

    + ½ of your social security benefit

    = Your Combined Income

    For reference, your AGI is the bottom number on the front page of your tax form 1040. ;It is essentially all of the income that you earn, minus deductions such as IRA and HSA contributions. ;Nontaxable interest is interest that you earn from municipal bonds, which is not subject to federal income taxes. ;;;

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    Next Steps To Consider

    A qualified distribution from a Roth IRA is tax-free and penalty-free, provided the 5-year aging requirement has been satisfied and one of the following conditions is met: age 59½ or older, disability, qualified first-time home purchase, or death.

    This information is intended to be educational and is not tailored to the investment needs of any specific investor.

    Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.

    Investing involves risk, including risk of loss.

    Past performance is no guarantee of future results.

    Fidelity Brokerage Services LLC, Member NYSE, SIPC, 900 Salem Street, Smithfield, RI 02917

    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. 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.

    You need to take your covered earnings and average them over the 35-year period representing your top earning years. The IRS sees this as your average indexed monthly earnings . The Social Security Administration then applies a formula to your AIME to calculate your primary insurance amount . This serves as the base figure for the Social Security Administration to calculate your Social Security Disability Insurance benefit amount.

    To understand your entire covered earnings history, the Social Security Administration 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.

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    Examples Of Tax Scenarios

    File as Individual in 2020: Assume that you’re single and you received $28,000 in Social Security benefits in 2019. Also assume that you had additional income of $15,000 and received $500 in tax-exempt interest. Half of your benefits, or $14,000, plus your other income of $15,500 gives you a combined income of $29,500. In this case, your income is below the 2020 $34,000 threshold for an individual filer, so only 50 percent of your $28,000 Social Security benefits are subject to federal income tax.

    : Assume that you’re married and that you receive $20,000 in Social Security benefits and your spouse receives $18,000. Also assume that you and your spouse had additional income of $25,000 plus $1,000 in tax-exempt interest. In this case, half of your combined benefits plus your other income totals $45,000, an amount that exceeds the threshold of $44,000 for those filing jointly. Consequently, up to 85 percent of your total Social Security benefits are subject to income tax.

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    State Social Security Taxes

    What Is FICA tax, and How Much Is It?

    Depending on which state you live in, you may need to pay state taxes on your Social Security benefits. Some states follow the federal calculations for taxing Social Security while others exempt certain citizens or don’t tax Social Security benefits at all. Contact your state comptroller’s office by phone or visit its website to learn your state’s policy on taxing benefits.

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    Social Security Taxation For Married Couples

    Lets look at an example for a couple, both age 67, who are married and file jointly. One is collecting a spousal Social Security benefit. They are both waiting until age 70 to claim their full retirement benefit amounts, so they can get the most possible. While delaying, they are taking large;withdrawals from a traditional IRA. Heres a snapshot of their income sources.

    • $10,000 gross Social Security income
    • $50,000 IRA withdrawal;

    The first step in the process is to calculate your provisional income. This is done by taking 50% of your social security benefit and adding it to your other sources of income; the IRA withdrawal in this case. Based on the first step, this makes their combined provisional income $55,000 .;Using the free Social Security taxation calculator in step two above, 85%;of their Social Security will be taxed, or $8,500 that will be input to box 5b.;They do not itemize deductions but instead use the standard deduction and exemptions.

    • Their adjusted gross income is $58,500
    • Their standard deduction is $24,800
    • Additional deduction for both spouses being over age 65 is $2,700
    • Taxable income is $31,000
    • Total tax due is $3,328
    • After-tax funds available to spend = $55,172

    Now lets look at this same couple three years later. Both are age 70 and receiving their full Social Security amounts. Heres a snapshot of their income sources.

    • $40,000 gross Social Security income
    • $20,000 IRA withdrawal

    Ways To Avoid Taxes On Benefits

    The simplest way to keep your Social Security benefits free from income tax is to keep your total combined income so low it falls below the thresholds to pay tax. However, few choose to live in poverty just to minimize their taxes.

    A more realistic goal is to limit how much tax you owe. Here’s a rundown of three solutions:

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    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 expected to last at least one year or 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.

    If you meet the requirements above and qualify for Social Security Disability Insurance certain members of your family may also receive benefits based on your work history.

    Are There State Taxes On Social Security Benefits

    Are your social security benefits taxable?

    Thirteen states tax Social Security benefits. These states are:

    • Vermont
    • West Virginia

    Check with local authorities to find out how your state handles Social Security benefits. In most instances, states offer exemptions for at least a portion of Social Security income from their taxes. If Social Security is your only source of income, you probably wont have to pay state taxes on your benefits, either.

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    Delay Claiming Your Social Security Benefits

    If you have other sources of retirement income, such as a 401 and other investments, or are working, you may consider delaying claiming your Social Security benefits. If you wait until age 70, youll get a larger benefit. Additionally, you will draw down your other accounts that may be taxed at a higher rate, possibly lowering how much you pay in Social Security income taxes later on.

    If you havent started receiving Social Security yet, consider taking IRA withdrawals before theyre required, said Zimmelman. This will reduce your IRA balance by the time you start Social Security.

    How Do You Calculate Capital Gains

    Every capital asset you own has a basis, which is generally the amount you paid for the property initially, plus any taxes or commissions. If you received the asset as a gift or from inheritance, theres a special calculation for figuring out your;adjusted tax basis.

    To calculate the amount of gain , simply subtract the proceeds received on the date of the sale from your adjusted tax basis. If the proceeds are more than your basis, youll generate a gain. If the proceeds are less than your basis, youll generate a loss.

    The capital gains tax rates apply to your;net;capital gains. If you had capital losses during the tax year , you may be able to use it to offset your gains.

    For example, lets say you had a $2,000 capital loss from the sale of a stock you held for 18 months thats a long-term capital loss. And you also had $3,000 in capital gain from the sale of another stock you held for 24 months. Since both assets were held long-term, you can net them against each other: $3,000 gain $2,000 loss = $1,000 net gain taxed at long-term capital gains rates.

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