Thursday, June 16, 2022

How To Figure Your Social Security Income

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Social Security Calculation Step : Adjust For Filing Age

Calculating Taxable Social Security (Taxes on Social Security Benefits) | Part 2 of 2

The easy way to look at it is to think about it in annual numbers.

Your benefit will be lower if you file at 62 and higher if you file at 70.

If you file after your full retirement age, your benefit will increase by 8% per year. If you file in the 3 year window immediately prior to your full retirement age your benefit will decrease by 6.66% per year of early filing. For anything more than 3 years before your full retirement age, your benefit will decrease by an additional 5%.

A lot of people dont want to retire on their birthday so its important to break this down by a monthly amount.

Tips For Saving On Taxes In Retirement

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  • What you pay in taxes during your retirement will depend on how retirement friendly your state is. So if you want to decrease tax bite, consider moving to a state with fewer taxes that affect retirees.
  • Another way to save in retirement is to downsize your home. Moving into a smaller home could lower your property taxes and it could also lower your other housing costs.

How Does The Calculator Estimate My Retirement Benefits Payment

Our simplified estimate is based on two main data points: your age and average earnings. Your retirement benefit is based on how much youve earned over your lifetime at jobs for which you paid Social Security taxes. Your monthly retirement benefit is based on your highest 35 years of salary history. You can get your earnings history from the Social Security Administration .

Your Social Security benefit also depends on how old you are when you take it. You can start collecting at age 62, the minimum retirement age, but youll get a bigger monthly payment if you wait until full retirement age, which is 66 but is gradually moving to 67 for people born in 1960 or after. If you can wait until 70 to start collecting, youll receive your maximum monthly benefit.

A single person born in 1960 who has averaged a $50,000 salary, for example, would get $1,332 a month by retiring at 62 the earliest to start collecting. The same person would get $1,911 by waiting until age 67, full retirement age. And he or she would get $2,370, the maximum benefit on those earnings, by waiting until age 70. Payments dont increase if you wait to collect past 70.

Other factors affecting the size of your benefit include whether youve worked for state or local government for more than 10 years your Social Security payment may be decreased if you paid into the civil service retirement program, for example.

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Combined Income For Individuals

To calculate your combined income, add together your adjusted gross income, the value of nontaxable interest income, plus half of your total Social Security benefits for the year. If you are an individual taxpayer, and your combined income is less than $25,000, you likely do not have to pay taxes on your benefits. If your combined income falls between $25,000 and $34,000, up to 50 percent of your benefits may be taxable. If your combined income exceeds $34,000, expect to pay taxes on up to 85 percent of your benefits.

How Are Social Security Survivor Benefits Calculated For Widows And Widowers

Taxes on Social Security

If someones spouse or ex-spouse dies and had earned benefits higher than the living spouse, then that survivor may be eligible for survivors benefits.

How much someone receives in survivor benefits depends on the lifetime earnings of the deceased worker and whether they claimed Social Security before they passed. If the deceased hadnt yet claimed Social Security benefits, their survivor could be eligible for a percentage of the benefit the deceased would have received at full retirement age. If the deceased did not claim benefits and lived past their full retirement age, the survivors benefit will be higher because the deceased would have earned delayed retirement credits.

However, if the deceased had started benefits before their death, their survivors will receive a percentage of the actual benefit the deceased worker received. How much they will receive varies depending on exactly what age the deceased claimed their benefits.

Moreover, if a survivor claims this benefit before their survivors full retirement age, the benefits are reduced by a percentage based on their birth year.

The precise percentage of benefits a survivor receives is as follows:

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How Do You Calculate Your Social Security Taxes

“Social Security taxes” can refer to taxes paid into the Social Security system or taxes paid on Social Security benefits. The taxes that fund Social Security come from the payroll tax, which is 6.2% for employees or 12.4% for self-employed individuals.

When you’re receiving Social Security benefits, you’ll still have to pay income taxes, but you won’t owe taxes on all of your benefits. Those whose total annual income tops $34,000 will pay income tax on 85% of their Social Security benefits. Otherwise, they will pay income tax on 50% of their Social Security benefits.

Tax Withholding And Estimated Tax Payments For Social Security Benefits

If you know in advance that a portion of your Social Security benefits will be taxed, it’s a good idea to have federal income taxes withheld from your payment each month. Simply fill out Form W-4V to request withholding at a rate of 7%, 10%, 12% or 22%, and then send the form to your local Social Security office.

If you don’t want to have taxes withheld from your monthly payments, you can make quarterly estimated tax payments instead. Either way, you just want to make sure you have enough withheld or paid quarterly to avoid an IRS underpayment penalty when you file your income tax return for the year.

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The Impact Of Roth Iras

If youre concerned about your income tax burden in retirement, consider saving in a Roth IRA. With a Roth IRA, you save after-tax dollars. Because you pay taxes on the money before contributing it to your Roth IRA, you will not pay any taxes when you withdraw your contributions. You also do not have to withdraw the funds on any specific schedule after you retire. This differs from traditional IRAs and 401 plans, which require you to begin withdrawing money once you reach 72 years old, or 70.5 if you were born before July 1, 1949.

So, when you calculate your combined income for Social Security tax purposes, your withdrawals from a Roth IRA wont count as part of that income. That could make a Roth IRA a great way to increase your retirement income without increasing your taxes in retirement.

Another thing to note is that many retirement plans allow individuals, aged 50 years or older, to make annual catch-up contributions. For 2021, you can make catch-up contributions up to $1,000. These must be made by the due date of your tax return. You have until April 15, 2022 to make the $1,000 catch-up contribution apply to your 2021 Roth IRA contribution total.

A Quick Note About Life Expectancy: According To The Social Security Administration Average Life Expectancy For A 65

Provisional Income (How to calculate taxes on Social Security)

Your spouse: If you are married, you can explore additional strategies to maximize the benefits you receive collectively. Start by taking your spouse’s age, health, and benefits into account, particularly if you’re the higher-earning spouse. The amount of survivor benefits for a lower-earning spouse could depend on the deceased, higher-earning spouse’s benefitthe bigger the higher-earning spouse’s benefit, the bigger the benefit for the surviving spouse.

Whether you’re still working. Earning a wage can reduce your benefit temporarily if you take Social Security early. If you’re still working and you haven’t reached your full retirement age, $1 in benefits will be deducted for every $2 you earn above the annual limit .

In the year you reach your full retirement age, the reduction falls to $1 in benefits deducted for every $3 you earn above a higher limit . However, starting the month you hit your full retirement age, your benefits are no longer reduced no matter how much you earn.

Again, any reduction in benefits due to the earnings test is only temporary. You receive the money back in the form of a recalculated higher benefit beginning at full retirement age, so don’t use the reduction as the sole reason to cut back on working or worrying about earning too much.

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To Wait Or Not To Wait

  • Consider taking benefits earlier if
  • Consider waiting to take benefits if
  • Consider taking benefits earlier if You are no longer working and can’t make ends meet without your benefits.
  • Consider waiting to take benefits if You are still working and make enough to impact the taxability of your benefits.
  • Consider taking benefits earlier if You are in poor health and don’t expect the surviving member of the household to make it to average life expectancy.
  • Consider waiting to take benefits if You are in good health and expect to exceed average life expectancy.
  • Consider taking benefits earlier if You are the lower-earning spouse and your higher-earning spouse can wait to file for a higher benefit.
  • Consider waiting to take benefits if You are the higher-earning spouse and want to be sure your surviving spouse receives the highest possible benefit.

When To Apply For Benefits How Much Youll Get

AARP, Updated April 19, 2021

All the information presented is for educational and resource purposes only. It is not intended to provide specific or investment advice. We don’t guarantee the accuracy of the tool and suggest that you consult with your advisor regarding your individual situation.

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Do You Expect To Live A Long Life

Many people live longer than they expect.

Because Social Security provides guaranteed income for life, it’s especially valuable to you when you reach age 80 and beyond. Claiming benefits at your full Social Security benefit age or later could be a good way to secure your monthly income during your later years. Your benefit increases the longer you wait to claim, up to age 70, and is adjusted annually with the cost of living. If you live into your 80s but claim at age 62 instead of your full retirement age or later, your total lifetime benefits will be lower by thousands of dollars.Calculate your expected longevity.

Claiming at your full benefit age could still make sense for you.

We understand it’s difficult to make predictions. You may want to plan for the possibility that you may spend 20 or more years in retirement. On average, a woman reaching age 65 today will live to age 87, and a man will live to age 84. Waiting to claim as long as you can could still make sense for you if you are married, are the higher earner in the household, and want your surviving spouse to keep the highest monthly benefit after you die. Remember, you can claim at any point between age 62 and 70. Each additional month that you wait to claim gives you a permanent increase in your monthly benefit which becomes more valuable as you age.Calculate your longevity.

There’s a good chance that you’ll live into your 80s and beyond.

A Guide On Taking Social Security

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The decision of when to take Social Security is highly dependent on your circumstances. You can start taking it as early as age 62 , wait until you’ve reached full retirement age or even until age 70. While there’s no “correct” claiming age for everybody, the rule of thumb is that if you can afford to wait, delaying Social Security can pay off over a long retirement. Here are some of the rules and guidelines.

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How Much Of My Social Security Income Is Taxable

Currently, the social security income that is taxable can never be more than 85% of your Social Security income. With that in mind, different circumstances will lead to you needing to pay different amounts of tax on your social security income.

For example, for single filers, if your combined income when filing taxes falls between $25,00 and $34,000 you will be called to pay taxes for up to 50% of your Social Security Benefits. If your combined income surpasses $34,000 then you could be made to pay for up to 85% of your Social Security benefits.

These limits change for married couples, you are only called to pay tax for up to 50% of their Social Security Benefits if they have a combined income between $32,000 and $44,000. If their combined income surpasses the $44,000 mark then they need to pay taxes for up to 85% of their social security income.

Therefore, knowing your specific circumstance will allow you to better determine what part of your Social Security income you will be called to pay taxes on. No matter how much your income is you will never be made to pay income taxes on more than 85% of your social security income.

When Will You Collect

The SSA calculates your benefit amount at your full retirement age . This depends on the year you were born. FRA by birth year is:

  • 19431954: age 66
  • 1955: age 66 and two months
  • 1956: age 66 and four months
  • 1957: age 66 and six months
  • 1958: age 66 and eight months
  • 1959: age 66 and 10 months
  • 1960 and later: age 67

The monthly amount you are eligible to receive at your FRA is considered your full benefit, but it is not your minimum or maximum benefit.

You have the option to file for early retirement as early as age 62. But, you may choose to delay taking your benefits until as late as age 70.

There are many reasons why you might choose to take early retirement or to delay it. That choice has a direct impact on the amount of your monthly payment. If you opt for early retirement, you are choosing a lower monthly payment for the rest of your life. By choosing to delay your benefit to any age between your FRA and age 70, you lock in an increase.

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Adjust Your Pia For The Age You Will Begin Benefits

The final amount of Social Security retirement benefit that you receive is based on the age when you begin benefits.

The earliest you can begin retirement benefits is age 62 . You get more by waiting until a later ageas late as age 70to begin benefits.

Of course, another complex formula is used to determine how much more you will receive if you wait.

This formula uses your Primary Insurance Amount calculated in the previous step. This is the amount you will get if you start benefits at your full retirement age . Your FRA can vary, depending on the year you were born. For people born between 1943 and 1954, as in our example, the FRA is age 66.

For people born on Jan. 1, the FRA is based on the year prior. Someone born on Jan. 1, 1955, will have an FRA based on 1954.

A reduction is applied to your PIA if you begin benefits before your FRA. A credit, referred to as a “delayed retirement credit,” is applied if you begin to receive benefits after your FRA.

Theres An Annual Social Security Cost

How to Calculate Social Security Tax

One of the best features of Social Security benefits is that the government adjusts the benefits each year based on inflation. This is called a cost-of-living adjustment, or COLA, and helps your payments keep up with increasing living expenses. The Social Security COLA is quite valuable its the equivalent of buying inflation protection on a private annuity, which can get expensive.

Because the COLA is calculated based on changes in a federal consumer price index, the size of the COLA depends largely on broad inflation levels determined by the government. In 2021, Social Security beneficiaries saw a 1.3% COLA in their monthly Social Security benefits.

The Kiplinger Letter predicted in September that the COLA for 2022 could be 6%, which would be the largest adjustment since 1982. The final COLA for 2022 will be announced on Oct. 13.

Heres what COLAs have been in other recent years:

  • 2009: 5.8%
  • 2021: 1.3%

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How Social Security Works

The Social Security Administration uses a multi-step formula to calculate just how much any given American gets in benefits. Factors include marriage, lifetime contributions, work history and more. But the purpose is always the same: to make sure that everyone who works has a safety net for retirement. To understand just how important that is we have to recall how senior citizens lived before President Franklin Roosevelt’s administration invented this program.

Although precise measurement hadn’t yet begun, most estimates suggest that in 1934 approximately half of all seniors lived in poverty. Most estimates suggest that this figure would have changed little over the past 84 years without the Social Security program. Instead, by 1959 this figure had fallen to 35%. By the year 2000 only 1-in-10 seniors lived in poverty, a number that has stayed largely consistent to this day. In many very real ways, Social Security created the concept of retirement.

Of course, there’s still far to go. Nearly a third of seniors still live within 200% of the poverty line, and many more still struggle to pay their bills.

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