Friday, May 20, 2022

What Part Of My Social Security Is Taxable

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What Percentage Of Social Security Is Taxable

Is My Social Security Taxable?

If you file as an individual, your Social Security is not taxable only if your total income for the year is below $25,000. Half of it is taxable if your income is between $25,000 and $34,000. If your income is higher than that, up to 85% of your benefits may be taxable.

If you and your spouse file jointly, you’ll owe taxes on half of your benefits if your joint income is between $32,000 and $44,000. If your income is above that, up to 85% is taxable income.

Are My Social Security Benefits Taxable

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Around this time of year, many people find themselves asking if their Social Security benefits are taxable? For most Americans, Social Security benefits, including Social Security Disability Income and Social Security Supplemental Income , are not taxable. However, depending on your financial situation, they can be. If you have additional retirement income from a 401k, IRAs, other retirement sources, or a part-time or full-time job, more than likely at least part of your Social Security benefits are taxable. Also, even if all you receive is Social Security, if your benefits are above the threshold, you must file a federal tax return. Depending on which state you live in, you may need to file a state tax return. Keep reading for details on how to determine if your Social Security benefits are taxable, and how the IRS determines how much of your Social Security benefits are taxable.

Social Security And Medicare

In addition to federal and possibly state income taxes, you will pay Social Security and Medicare taxes on any wages earned in retirement. There is no age limit on these withholdings, nor any exemption for any sort of Social Security benefits status.

The good news is that these earnings can also count toward the calculation of your benefits. The Social Security Administration checks your earnings record each year and will increase your benefit, if appropriate, based on these additional earnings.

If you are making much less in retirement than before, could it hurt your benefits? No, because the benefit payment is still based on your 35 highest years of earnings. At worst, there would be no impact at best, it could help if this replaces any of the lower 35 years.

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The bad news is that your earnings may not only push you into a higher tax bracket, but also into a higher threshold for your Medicare premiums once you are over 65. Medicare sets the cost for Part B each year at a fixed rate for most participants , but it increases for individuals with an annual income over $87,000 and married couples with an annual income above $174,000. The cost for these higher-earning participants can range from $202.40 to $491.60 per month in 2020.

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Social Security And Railroad Retirement Benefits

If your social security or railroad retirement benefits were taxed on your federal return, you may take a deduction for those benefits on your North Carolina individual income tax return. You may take this deduction because this income has already been included as part of your federal adjusted gross income and North Carolina does not tax this income. This deduction will increase your refund or decrease the amount you must pay.

Any social security benefits you received that are not included in your federal adjusted gross income cannot be deducted on your North Carolina return. If your federal adjusted gross income includes social security benefits, enter the taxable amount of social security benefits on Form D-400 Schedule S, Part B Deductions from Federal Adjusted Gross Income, Line 20. The total deductions from federal adjusted gross income entered on Form D-400 Schedule S, Line 34, also needs to be entered on Form D-400, Line 9.

State Taxes On Social Security Benefits

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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 13 states that collect taxes on at least some Social Security income. Four of those states follow the same taxation rules as the federal government. So if you live in one of those four states then you will pay the states regular income tax rates on all of your taxable benefits .

The other nine 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 37 states do not tax Social Security income.

State Taxes on Social Security Benefits
Taxed According to Federal RulesMinnesota, North Dakota, Vermont, West Virginia
Partially TaxedColorado, Connecticut, Kansas, Missouri, Montana, Nebraska, New Mexico, Rhode Island, Utah
No State Tax on Social Security BenefitsAlabama, Alaska, Arizona, Arkansas, California, Delaware, District of Columbia, Florida, Georgia, Hawaii, Idaho, Illinois, Indiana, Iowa, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Mississippi, Nevada, New Hampshire, New Jersey, New York, North Carolina, Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, South Dakota, Tennessee, Texas, Virginia, Washington, Wisconsin, Wyoming

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How To Reduce Social Security Taxes

It’s hard to reduce those taxes but it’s not impossible.

If you can lower your adjusted gross income or AGI, you can reduce the amount of tax created on your Social Security benefit, Freitag explains.

There are two common ways to lower your AGI and another, which which is less common:

  • Take distributions from your Roth IRA, which are generally tax-free, versus your traditional IRA
  • Take certain distributions from your cash-value life insurance policy, if you have one
  • Taking money from a reverse mortgage, if you have one, is yet another way to create a cash flow that could help reduce how much income tax you might pay on your Social Security benefits.

    State Social Security Taxes

    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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    State Taxation Of Social Security Benefits

    In addition to federal taxes, some states tax Social Security benefits, too. The methods and extent to which states tax benefits vary. For example, New Mexico treats Social Security benefits the same way as the federal government. On the other hand, some states tax Social Security benefits only if income exceeds a specified threshold amount. Nebraska, for instance, taxes Social Security benefits only if your income is at least $43,000, or $58,000 if you’re married filing a joint return. Utah includes Social Security benefits in taxable income but allows a tax credit for a portion of the benefits subject to tax.

    How Is The Social Security Tax Used

    How much of my social security disability and pension are taxable?

    Income taxes you pay are deposited into the general fund of the United States. They can be used for any purpose, but Social Security taxes are different.

    These taxes are paid into special trust funds that should only be used to pay current and future Social Security retirement benefits, as well as disability benefits and benefits for widows and widowers. Today’s workers contribute their percentage, which in turn is paid to today’s beneficiariesthose workers who have retired and who are now collecting Social Security benefits. When today’s workers retire, they’ll tap into the benefits being paid by tomorrow’s workers.

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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.

        For 2021, the Social Security tax rate for both 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.

        Coronavirus And 2020 Fica Payments

        The Coronavirus, Aid, Relief and Economic Security Act, also known as the CARES Act, has given employers some temporary relief on payroll taxes. Section 2302 allows employers to defer paying their portion of Social Security taxes through .

        It’s important to note that this is a deferral, not complete forgiveness. Youll still be responsible for paying the taxes. Half of the amount you deferred will be due on , while the other half will be due on .

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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 2021, the maximum amount of income subject to the OASDI tax is $142,800, capping the maximum annual employee contribution at $8,853.60. The amount is set by Congress and can change from year to year.

        The wage limit is inflation-indexed annually and can be found in IRS Publication 15 for most employees, or Publication 51 for agricultural workers. According to IRS Publication 15, wages subject to FICA include all income received for services performed, unless specifically excluded. The payment doesn’t have to be by cash or check.

        Know The Earnings Limits

        Is Social Security Income Taxable in 2020?

        Those hoping to work in retirement need to be especially careful if they’re planning to claim Social Security benefits early. Even if youâre just working part-time, itâs important to consider how that continuing income will affect your benefits.

        The SSA caps how much you are allowed to earn if you start taking your benefits before full retirement age, which is 66 for most baby boomers. In 2021, the annual earned income cap is $18,960, and for every $2 you earn over that limit, the SSA withholds $1 off the top of your benefits. So if you earn $20,960 this year and you haven’t yet reached the year you will turn full retirement age, your benefits will be reduced by $1,000âon top of any income taxes you may have to pay on the remaining benefits. Once you reach the year that you’ll turn full retirement age, the earned income cap goes up to $50,520 and for every $3 you go over, it’s a $1 withholding.

        There is some good news, however: Because the penalty is determined by your individual earned income, if you retire early but your spouse doesn’t, your spouse’s earned income will not be factored into the earnings limit. Additionally, when you reach your full retirement age, the earnings limit disappears and Social Security will recalculate your benefit amount if you were negatively impacted by the earnings limit.

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        How The West Taxes Social Security

        Nine of the 13 states in the West don’t have income taxes on Social Security. Alaska, Nevada, Washington, and Wyoming don’t have state income taxes at all, and Arizona, California, Hawaii, Idaho, and Oregon have special provisions exempting Social Security benefits from state taxation. That leaves Colorado, Montana, New Mexico, and Utah, which impose taxes on Social Security for some individuals.

        What’s Included In Social Security Wages And What’s Not

        Some common types of compensation payments made to employees are exempt from being included as Social Security wages. They’re not subject to FICA tax.

        • Some disabled worker wages paid after the year in which the worker was entitled to collect disability insurance
        • Employee business travel expenses reimbursed for amounts not exceeding the specified government rate for per diems or the standard mileage rate
        • Compensation paid to family employees under age 18, or age 21 for domestic work
        • Some”excess” fringe benefits that are taxable on an excess of the fair market value of the benefit over the sum of an amount paid for it by the employee and any amount that’s excludable by law
        • Employee insurance
        • Workers compensation benefits

        Additionally, earnings are only taxable for the Social Security portion of the FICA tax up to a certain maximum, which changes each year. Earnings begin accumulating again toward this “wage base” on January 1 of the next year.

        The Social Security wage base is indexed for inflation so it can be expected to increase a bit annually.

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        Can You Live On Social Security Alone

        Surviving on Social Security alone in retirement would be difficult for most. The average person received just $17,040 per year in 2019. The maximum Social Security benefit for 2020 is expected to be $2861 at full retirement age. . For sure this is a good amount of money, dont get me wrong, but not exactly living rich.

        How much of your Social Security benefits will be taxed will ultimately depend on your other income sources. This will be a combination of all other earnings in a given year, plus some portion of your Social Security benefits. These other sources will include everything from distributions from your 401 or IRA, wages from work, royalties or rental income.

        Most people know to have a strategy to get the largest Social Security Benefits throughout their retirements. Having a plan to pay the least amount of taxes on your Social Security benefits it much less common.

        Keep reading to learn more about Social Security taxation.

        Living off of Social Security alone will be a stretch for most retirees.

        Getty

        Are All Kinds Of Social Security Income Taxable

        Is Social Security Taxable?

        All social security benefits are taxable in the same way. This is true whether theyre retirement, survivors, or disability benefits. Take note that Social Security benefits paid to a child under his or her Social Security number could be potentially taxable to the child, not the parent. Note: Supplemental Security Income, or SSI, is a non-taxable needs-based federal benefit. It is not part of Social Security benefits and does not figure into the taxable benefit formula.

        Adjusted Gross Income is simply your total gross income minus specific deductions. Additionally, your Adjusted Gross Income is the starting point for calculating your taxes and determining your eligibility for certain tax credits and deductions that you can use to help you lower your overall tax bill.

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        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

        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 To Pay Capital Gains Tax When On Social Security

        Capital gains and Social Security benefit taxes have a circular relationship. If your capital gains and income from other sources is low enough, your Social Security benefits may not be taxable. That, in turn, lowers your taxable income and can decrease the tax rate you pay on capital gains. On the other hand, large capital gains can cause your Social Security benefits to become taxable, which also may increase the amount you’ll have to pay the IRS.

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