Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January, detailing the benefits you received during the previous tax year. You can use it to determine whether you owe federal income tax on your benefits. The information is available online if you enroll on the Social Security site.
If you owe taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or have federal taxes withheld from your payouts before you receive them.
Make Adjustments To Income
They include contributions to a health savings account or self-employed retirement plan, health insurance premiums for self-employed people, student loan interest, and more. You can find more details on adjustments to income in the IRS Instructions for Form 1040.
Returning to the example above, say you contributed $3,000 to your HSA in 2021. When you subtract that amount from your gross income, your AGI is $83,000.
Just Started Collecting Social Security Here’s How To Know Whether You’ll Owe Taxes On It
Roughly 1 in every 2 older adults will pay federal income taxes on a portion of their Social Security benefits for the 2020 tax year.
To be sure, this usually happens only if you have other substantial income in addition to your Social Security benefits, such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return, according to Uncle Sam.
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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 Social Security Tax
Social Security tax is a federal tax that pays for things like the Social Security benefits you get from the federal government when you retire, survivor benefits for your family if you die, disability benefits, etc.
If you, your children or your widow ever receive any kind of Social Security income, these taxes are probably what paid for it.
Both employees and employers have to pay into Social Security tax. Payroll taxes like Medicare and Social Security are usually grouped together as FICA . Itâs also referred to as âold age, survivors, and disability insurance taxâ , Social Security taxes pay into the United States Social Security Administrationâs Social Security programsâretirement benefits, disability benefits, dependent and survivor benefits, etc.
If youâre self-employed, youâll hear tax professionals refer to your Social Security and Medicare tax as âself-employment tax.â
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Are There State Taxes On Social Security Benefits
Thirteen states tax Social Security benefits. These states are:
- 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.
How To Calculate It
To calculate how much Social Security tax you need to withhold from an individual employeesâ paycheck, multiply your employeeâs gross income for the current pay period by 6.2%, which is the current Social Security tax rate.
For example, letâs say an employeeâs gross pay for the current month is $2,000. To calculate Social Security tax withholding for that month, youâd make the following calculation:
$2,000 x 0.062 = $124
In this case, you would withhold $124 from the employeeâs paycheck, and contribute another $124 to their Social Security yourself.
Now letâs say your employee makes more than the $137,700 wage base for 2020. They make $140,000 a year. How much Social Security tax will you need to withhold from their paycheck each month?
Youâre only required to withhold 6.2% of their pay on the first $137,700 they make, or the first $11,475 they make every month. Donât withhold for any salary above that maximum amount.
That means their monthly Social Security withholding would be:
$11,475 x 0.062 = $711.45
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Calculate Your Gross Income
Add up all sources of taxable income, such as wages from a job, income from a side hustle, investment returns, etc.
To illustrate, say your income for 2021 includes the following:
- $75,000 in wages
- $1,000 in taxable interest and dividends
- $10,000 from a side hustle
- $5,000 in gifts from your grandparents
Of those sources, only the gift is non-taxable. So for tax purposes, your gross income is $86,000.
Will You Owe Here’s How To Know
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% of your benefits
- More than $34,000: Up to 85% of your benefits may be taxable.
If you 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% of your benefits.
- More than $44,000: Up to 85% of your benefits may be taxable.
And if you are married and file a separate tax return, you probably will pay taxes on your benefits.
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How To Report Your Social Security Income
Each January, you will receive a Form Social Security 1099, SSA-1099, that shows the total benefits you received for the previous year and the total amount you are required to report to the IRS on your federal tax return.
If you misplaced your form, you can download a copy by creating a free online account with the Social Security Administration.
You will report the amount in Box 5 of Form SSA-1099 and the total amount on line 6a of your Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. The amount considered taxable income depends on what other income you earned during the year, which you should note on line 6b of Form 1040 or Form 1040-SR.
Remember: The taxable amount of your benefits is based on your filing status and combined income. If you need to calculate the taxable amount of Social Security benefits, you can use this worksheet.
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
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What Types Of Social Security Income Taxable
Actually ,all kinds of social security benefits taxable in the same way. Social security benefits include monthly retirement benefits, survivor, and disability benefits.However, social security benefits paid to a child under his or her Social Security number is taxable to the child, not the parent.
Exception to this rule is Supplemental Security Income which is a non-taxable as it is not considered part of Social Security benefits and does not figure into the taxable benefit formula.
How Contributions Are Calculated
The FICA tax is your contribution to Social Security and Medicare as a percentage of your salary:
If you’re an employee, then you pay one half of this total your employer pays the other half for you .If you’re self-employed, then you pay the whole total yourself as Self-Employment tax, and then get a tax deduction on half of it as an “adjustment” on your tax return.
Now here’s where it gets a little confusing.What the previous paragraph shows is that being self-employed is like being an employee, but at a lower salary – lower by the FICA “half” that employers pay for their employees.And so, if you’re self-employed, you don’t have to pay FICA on all your salary, just on 92.35% of it.
Tax Liability For Social Security Benefits
Taxable Social Security benefits are taxed at ordinary tax rates. Your tax bracket is determined by your filing status and your adjusted gross income after considering deductions and credits. After identifying your tax bracket on the current year’s tax table, multiply the rate by the amount of taxable Social Security benefits to calculate the tax you’ll pay on the benefits. For example, if $6,000 of your benefits are taxable and you’re in the 15 percent income tax bracket, you’ll pay $900 in tax on your benefits.
Itemize Or Claim The Standard Deduction
You generally have a choice between itemizing deductions or claiming the standard deduction, whichever option is easiest or will result in the lowest tax bill.
The standard deduction is a flat amount determined by the IRS based on your filing status. To itemize deductions, you have to keep track of amounts you paid for things like out-of-pocket medical expenses, home mortgage interest, state and local taxes , and charitable contributions. You list each of these expenses on Schedule A and attach it to your return.
For 2021, even if you dont itemize, you can claim up to $300 of cash donations to qualifying charities on line 12b of your Form 1040.
Example Of Social Security Taxation:
Let’s say a single, 68-year-old retired woman, Susan, receives the average Social Security benefit, totaling $18,516 for the year.
Susan collected $30,000 from other means throughout the year, so her provisional income is $39,258 .
Then, 85% of Susan’s total Social Security benefit, $15,738, is subject to federal income tax.
Every January, the Social Security Administration sends an earnings statement to Social Security recipients Form SSA-1099 showing the amount they were paid in benefits throughout the tax year. The statement is used to fill out their federal income tax return, which will determine whether tax is owed on Social Security benefits. Some states also tax Social Security benefits.
If Social Security recipients anticipate they’ll need to pay federal taxes on their benefit and want to do it ahead of time, they can make estimated quarterly payments or elect to have federal taxes withheld either 7%, 10%, 12%, or 22% of their monthly benefit.
Federal Exemptions For Social Security Tax
If your total income was low enough, you may not need to pay federal taxes on any of your Social Security income. To find out if any of your benefits are taxable, compare your base income to the allowance for your tax filing status. Your base income is your income from all sources — including tax-exempt interest — other than Social Security, plus half of your Social Security benefits. For example, say your income other than Social Security was $10,000 and your Social Security benefits were $8,000. Your base income would be $14,000 . Single filers, head of household filers and widowers may have up to $25,000 in base income and pay no taxes on Social Security. The limit is $32,000 for married couples filing jointly.
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How Your Primary Insurance Amount Is Calculated
Once you have your AIME, you can calculate your primary insurance amount , the base rate for your Social Security payments. The PIA calculation relies on so-called bend points that determine how much of your income will be replaced by Social Security benefits in retirement.
Think of bend points as similar to tax brackets, in that they determine a percentage of your benefits based on incremental buckets of earnings. There are three bend point buckets: one for 90% of income replacement, one for 32% and one for 15%.
These bend point buckets help give lower lifetime earners a higher percentage of income replacement, and higher lifetime earners a lower rate of income replacement, says Jim Blankenship, certified financial planner and author of A Social Security Owners Manual.
The dollar amounts of bend points are adjusted for inflation each year, but the percentages of each bend point are set by law and remain unchanged. AIME amounts are always rounded down to the nearest $0.10. For 2021, the bend points are:
90% of the first $996 of your AIME, plus
32% of your AIME between $996 and $6,002, plus
15% of your AIME over $6,002
For a worker with an AIME of $6,250, the calculation would look like this:
90% of $966 = $896.40, plus
32% of $5,006 = $1,601.92, rounded down to $1,601.90, plus
15% of $248 = $37.20
This worker would earn a monthly Social Security benefit of $2,535.50 .
Calculating Your Social Security Income Tax
If your Social Security income is taxable, the amount you pay in tax will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income. If you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your social security benefits in 2021, according to the Social Security Administration.
For the 2021 tax year, single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income was more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.
For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.
If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either a) half of your annual Social Security benefits or b) half of the difference between your combined income and the IRS base amount.
The example above is for someone who is paying taxes on 50% of his or her Social Security benefits. Things get more complicated if youre paying taxes on 85% of your benefits. However, the IRS helps tax payers by offering software and a worksheet to calculate Social Security tax liability.
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. Here’s 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.
- Then, any tax-exempt interest is added.
- If that total exceeds the minimum taxable levels, at least half of your Social Security benefits will be considered taxable income. You then have to take the standard deduction or itemize deductions in order 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 = your adjusted gross income + nontaxable interest + half of your Social Security benefits
How To Minimize Taxes On Your Social Security
If your Social Security benefit is relatively fixed, albeit with small annual increases, you really have only two avenues left to get into that tax-free zone: reducing tax-exempt interest or adjusted gross income. And since most people dont have tax-exempt interest, youre left with one option.
Therefore, the secret is to reduce your adjusted gross income in order to prevent provisional income from triggering a tax on Social Security, says Kelly Crane, president and chief investment officer at Napa Valley Wealth Management in St. Helena, California.
Here are a few ways to reduce your adjusted gross income to get into the tax-free zone: