Thursday, June 16, 2022

When Did Social Security Become Taxable

Don't Miss

Do Pensions Count As Earned Income

How is Your Social Security Benefit Taxed in Retirement?

For the year you are filing, earned income includes all income from employment, but only if it is includable in gross income. Earned income does not include amounts such as pensions and annuities, welfare benefits, unemployment compensation, workers compensation benefits, or social security benefits.

Demographic And Revenue Projections

This section’s factual accuracy may be compromised due to out-of-date information. The reason given is: Several of these projected dates have passed, and some language referring to data as ‘current’, ‘latest’, ‘most recent’, etc. is as old as 2005, or undated. Please help update this article to reflect recent events or newly available information.

In 2005, this exhaustion of the OASDI Trust Fund was projected to occur in 2041 by the Social Security Administration or by 2052 by the Congressional Budget Office, CBO. Thereafter, however, the projection for the exhaustion date of this event was moved up slightly after the recession worsened the U.S. economy’s financial picture. The 2011 OASDI Trustees Report stated:

Annual cost exceeded non-interest income in 2010 and is projected to continue to be larger throughout the remainder of the 75-year valuation period. Nevertheless, from 2010 through 2022, total trust fund income, including interest income, is more than is necessary to cover costs, so trust fund assets will continue to grow during that time. Beginning in 2023, trust fund assets will diminish until they become exhausted in 2036. Non-interest income is projected to be sufficient to support expenditures at a level of 77 percent of scheduled benefits after trust fund exhaustion in 2036, and then to decline to 74 percent of scheduled benefits in 2085.

Ways to eliminate the projected shortfall

Maximum Taxable Earnings Rose To $147000

In 2021, employees were required to pay a 6.2% Social Security tax on income of up to $142,800. Any earnings above that amount were not subject to the tax. In 2022, the tax rate remained the same at 6.2% , but the income cap increased to$147,000.

The flip side is that as the taxable maximum income increases, so does the maximum amount of earnings used by the SSA to calculate retirement benefits. In 2021, the maximum monthly Social Security benefit for a worker retiring at full retirement age was $3,148. In 2022, the maximum benefit increases by $197 per month to $3,345.

Recommended Reading: My Social Security Account Activation Code

Taxing Social Security Benefits Is Sound Policy

Social Security beneficiaries with higher incomes pay income tax on part of their benefits. Those with incomes below $25,000 pay no tax on benefits, while those with the highest incomes pay tax on as much as 85 percent of their benefits. This arrangement is sound for several reasons:

  • The substantial proceeds from taxing Social Security benefits are credited to the Social Security and Medicare trust funds, strengthening the programs financing.
  • The taxation of benefits is broadly progressive, since people with low incomes pay nothing and the tax rate on benefits increases with income.
  • As an earned benefit, Social Security should be subject to tax, like other earned benefits, such as employer pensions.
  • Social Securitys tax treatment is more favorable than that of private defined-benefit pensions, primarily because of the protections for low-income beneficiaries.

Dont Forget Social Security Benefits May Be Taxable

When Did Social Security Become Taxable?

Tax Tip 2020-76, June 25, 2020

Taxpayers receiving Social Security benefits may have to pay federal income tax on a portion of those benefits.

Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.

The portion of benefits that are taxable depends on the taxpayer’s income and filing status.

Also Check: How Do I Know What My Social Security Benefits Are

Claim That It Is A Ponzi Scheme

Critics have drawn parallels between Social Security and Ponzi schemes, arguing that the sustenance of Social Security is due to continuous contributions over time. One criticism of the analogy is that while Ponzi schemes and Social Security have similar structures , they have different transparencies. In the case of a Ponzi scheme, the fact that there is no return-generating mechanism other than contributions from new entrants is obscured whereas Social Security payouts have always been openly underwritten by incoming tax revenue and the interest on the Treasury bonds held by or for the Social Security system. The sudden loss of confidence resulting in a collapse of a conventional Ponzi scheme when the scheme’s true nature is revealed is unlikely to occur in the case of the Social Security system. Private sector Ponzi schemes are also vulnerable to collapse because they cannot compel new entrants, whereas participation in the Social Security program is a condition for joining the U.S. labor force. In connection with these and other issues, Robert E. Wright calls Social Security a “quasi” pyramid scheme in his book, Fubarnomics.

How Can I Avoid Paying Taxes On Social Security

5 Ways to Avoid Taxes on Your Social Security Benefits Buy a QLAC. You can invest up to $125,000 from your IRA or 401 in a special version of a deferred-income annuity called a Qualified Longevity Annuity Contract . Withdraw money from tax -free Roths. Be careful with income investments. Put your tax moves into perspective.

Also Check: Who Gets Social Security Checks

Taxes On Benefits Support Social Security And Medicare

The proceeds from taxing Social Security benefits provide an increasingly important source of income for both Social Security and Medicare.

  • The revenue from taxing up to 50 percent of Social Security benefits is devoted to the two Social Security trust funds. In 2019, this will provide an estimated $36.9 billion in income to the Old-Age and Survivors and Disability Insurance trust funds, or about 3.5 percent of their total income. Since the income thresholds are not indexed for inflation, taxes on benefits will grow to 7.4 percent of Social Security income by 2028.
  • The revenue from taxing 50 to 85 percent of Social Security benefits is devoted to Medicares Hospital Insurance trust fund. This will represent $24.1 billion, or 7.4 percent, of HI income in 2019 and 12.4 percent of income by 2028.

The taxation of benefits will provide almost $1 trillion to the Social Security and Medicare trust funds over the next ten years. Without this income, the programs would face greater funding shortfalls and earlier reserve depletion dates.

Contact An Affordable Relocation Company In Dallas Tx

A New Terrible Social Security Tax Plan

Relocations are very stressful for everyone involved, especially if you are planning to move to another state. We recommend hiring a professional long distance moving expert to make things easier for you. When you decide to let our company help you with your relocation, you are guaranteed to save the following: time, money, stress, and the packing done right. The key ingredient to any successful move is to plan and prepare early. Our experts understand that and make the best of the situation. The one thing that we can give you above all else is a peace of mind. Let us organize every aspect of your relocation so you can focus on more important things!

Recommended Reading: When Do You Receive Your Social Security Check

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.

Up To 85% Of A Taxpayer’s Benefits May Be Taxable If They Are:

  • Filing single, head of household or qualifying widow or widower with more than $34,000 income.

The Interactive Tax Assistant on IRS.gov can help taxpayers answer the question Are My Social Security or Railroad Retirement Tier I Benefits Taxable?

The tax filing deadline has been postponed to Wednesday, July 15, 2020. The IRS is processing tax returns, issuing refunds and accepting payments. Taxpayers who mailed a tax return will experience a longer wait. There is no need to mail a second tax return or call the IRS.

Don’t Miss: Socialsecrity

Tax On Wages And Self

Benefits are funded by taxes imposed on wages of employees and self-employed persons. As explained below, in the case of employment, the employer and employee are each responsible for one half of the Social Security tax, with the employee’s half being withheld from the employee’s pay check. In the case of self-employed persons , the self-employed person is responsible for the entire amount of Social Security tax.

The portion of taxes collected from the employee for Social Security are referred to as “trust fund taxes” and the employer is required to remit them to the government. These taxes take priority over everything, and represent the only debts of a corporation or LLC that can impose personal liability upon its officers or managers. A sole proprietor and officers of a corporation and managers of an LLC can be held personally liable for non-payment of the income tax and social security taxes whether or not actually collected from the employee.

A separate payroll tax of 1.45% of an employee’s income is paid directly by the employer, and an additional 1.45% deducted from the employee’s paycheck, yielding a total tax rate of 2.90%. There is no maximum limit on this portion of the tax. This portion of the tax is used to fund the Medicare program, which is primarily responsible for providing health benefits to retirees.

The Social Security tax rates from 1937â2010 can be accessed on the Social Security Administration‘s website.

Wages not subject to tax

State Taxes On Social Security Benefits

Are Social Security Benefits Taxable After Age 62?

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

Also Check: What Would My Social Security Be

How Did Social Security Benefits Become Taxable

The history of Social Security benefit taxation isn’t all that long. Until about 35 years ago, there wasn’t any income tax on Social Security. Efforts to deal with a looming financial crisis for the retirement program led lawmakers to consider the provisions, with the idea that raising revenue from a portion of those who collect benefits might be enough to help preserve Social Security for the long run.

Rather than making Social Security taxable for everyone, though, lawmakers imposed an income test. The IRS looks at your total income from non-Social Security sources and adds in one-half of your Social Security income. That outside income includes not only wages and salaries but also investment income like interest and stock dividends. Capital gains on investments are also included, as is any pension income you might receive from a former employer.

Once you have that total, you’ll need to compare it to the income levels in the table below. If it’s greater than the number in the middle column, then you can owe tax on up to half of your Social Security income. Once it rises above the figure in the rightmost column, that percentage rises to as much as 85% of your income becoming taxable.

Filing Status

Data source: IRS.

Spouse’s Benefit And Government Pension Offsets

The spouse or divorced spouse of a retirement beneficiary is eligible for a Social Security spouse benefit if the spouse or divorced spouse is 62 or older. The benefit amount is equal to 50 percent of the retirement beneficiary’s Primary Insurance Amount if the spouse claims the benefit at the full retirement age or later. If a person is eligible for both a retirement benefit based the person’s own work in Social Security covered employment and a spouse benefit based on a spouse’s work in covered employment, SSA will pay a total amount approximately equal to the higher of the two benefits. For example, if at the full retirement age, a spouse claims a retirement benefit of $300 and a spouse benefit of $450, SSA will pay the person a $300 retirement benefit and a $150 dollar partial spouse benefit for a total benefit of $450.

A spouse is eligible after a one-year duration of marriage requirement is met and a divorced spouse is eligible for spousal benefits if the marriage lasted for at least ten years and the person applying is not currently married. Payment of benefits to a divorced spouse does not reduce the Social Security benefits of the retired worker or family members of the retired worker, such as the worker’s current spouse. A divorced person can claim spousal benefits once the former spouse is eligible for retirement benefits, regardless of whether the former spouse has claimed those retirement benefits.

Read Also: How Much Will My Social Security Benefit Be

Private Retirement Savings Crisis

While inflation-adjusted stock market values generally rose from 1978 to 1997, from 1998 through 2007 they were higher than in March 2013. This has caused workers’ supplemental retirement plans such as 401s to perform substantially more poorly than expected when current retirees were investing the bulk of their savings in them. In 2010, the median household retirement account balance for workers aged 55 to 64 was $120,000, which will provide only a trivial supplement to Social Security benefits, but about a third of households had no retirement savings at all. 75% of Americans nearing retirement age had less than $30,000 in their retirement accounts, which Forbes called “the greatest retirement crisis in American history.”

When Did Social Security Benefits Become Taxable Under The Irs Income Tax Code

Tax Questions: Is Social Security and disability income taxable?

In 1981 the National Commission on Social Security Reform was appointed by Congress and President Reagan to work onthe financing crisis in Social Security. The result of their studyincluded several amendments that were passed by Congress, signed byPresident Reagan and made into law in 1983. The specific ruleapplying to the taxation of Social Security benefits for the firsttime is copied below:

If the taxpayer’s combined income exceeds athreshold amount , the amount of benefits subject to income tax is thelesser of 50% of benefits or 50% of the excess of the taxpayer’scombined income over the threshold amount. The additional incometax revenues resulting from this provision are transferred to thetrust funds from which the corresponding benefits were paid.Effective for taxable years beginning after 1983.

Recommended Reading: How Many Years Of Earnings Is Social Security Based On

History Of Social Security In The United States

A limited form of the Social Security program began as a measure to implement “social insurance” during the Great Depression of the 1930s, when poverty rates among senior citizens exceeded 50 percent.

The Social Security Act was enacted August 14, 1935. The Act was drafted during President Franklin D. Roosevelt’s first term by the President’s Committee on Economic Security, under Frances Perkins, and passed by Congress as part of the New Deal. The Act was an attempt to limit what were seen as dangers in the modern American life, including old age, poverty, unemployment, and the burdens of widows and fatherless children. By signing this Act on August 14, 1935, President Roosevelt became the first president to advocate federal assistance for the elderly.

The Act provided benefits to retirees and the unemployed, and a lump-sum benefit at death. Payments to current retirees are financed by a payroll tax on current workers’ wages, half directly as a payroll tax and half paid by the employer . The act also gave money to states to provide assistance to aged individuals , for unemployment insurance , Aid to Families with Dependent Children , Maternal and Child Welfare , public health services , and the blind .

More articles

Popular Articles