Why Retirees Had To Pay Tax On Social Security In The First Place
Social Security wasn’t treated as taxable income until the early 1980s, when another reform effort changed the rules on taxation of benefits. Because Social Security was running into financial trouble, lawmakers agreed to look at ways to raise revenue in order to help pay for the program.
The decision that Washington eventually made was to create a test based on income, so that only some of those getting Social Security benefits would end up having to pay extra income tax. How the test works is that you take your total income from most sources other than Social Security and then add in 50% of your benefits for the year. So if you’re still working, then your job income gets considered, and those with investments have to include their interest and dividends in the mix. Pension income also gets included if you’re fortunate enough to receive payments from an employer.
If your income under that calculation is larger than certain thresholds, then at least a portion can be subject to tax. The table below includes two thresholds: one that applies to make up to half of your benefits subject to tax, and another above which up to 85% of your Social Security can end up having to get included in your taxable income.
Amendments Of The 1970s
In June 1972, both houses of the United States Congress approved by overwhelming majorities 20% increases in benefits for 27.8 million Americans. The average payment per month rose from $133 to $166. The bill also set up a cost-of-living adjustment to take effect in 1975. This adjustment would be made on a yearly basis if the Consumer Price Index increased by 3% or more. This addition was an attempt to index benefits to inflation so that benefits would rise automatically. If inflation was 5%, the goal was to automatically increase benefits by 5% so their real value didn’t decline. A technical error in the formula caused these adjustments to overcompensate for inflation, a technical mistake which has been called double-indexing. The COLAs actually caused benefits to increase at twice the rate of inflation.
In October 1972, a $5 billion piece of Social Security legislation was enacted which expanded the Social Security program. For example, minimum monthly benefits of individuals employed in low income positions for at least 30 years were raised. Increases were also made to the pensions of 3.8 million widows and dependent widowers.
These amendments also established the Supplemental Security Income . SSI is not a Social Security benefit, but a welfare program, because the elderly and disabled poor are entitled to SSI regardless of work history. Likewise, SSI is not an entitlement, because there is no right to SSI payments.
Paying Taxes On Social Security
You should get a Social Security Benefit Statement each January detailing the benefits that 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 website.
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.
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How Can I Find Out If My Social Security Benefits Are Taxable
The portion of benefits that are taxable depends on the taxpayers income and filing status. To find out if their benefits are taxable, taxpayers should: Take one half of the Social Security money they collected during the year and add it to their other income. Other income includes pensions, wages, interest, dividends and capital gains.
At What Age Are Social Security Benefits Taxed
Whether taxes are taken out of someone’s social security benefits isn’t a matter of age. Age determines when they can receive benefits. According to the IRS, social security benefits may be taxed if they’re not a person’s only source of income.
The amount of money someone needs to make for the benefits to be taxed varies. If a person is filing taxes as an individual and their overall income is between $25,000 and $34,000, they could pay income tax on up to 50 percent of their benefits.
For anything more than $34,000, a person could pay taxes on up to 85 percent of their benefits. The requirements change if they file taxes with a spouse or if they’re married but file separately.
How do I swipe left on this tax season?
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When Did The Government Begin Taxing Social Security Annuities
The federal government began taxing Social Security annuities in1984, after Congress passed amendments to the Social Security Actin early 1983, and President Reagan signed the legislation into lawin April of that year.
The 1984 rule allowed 50% of a person’s annual Social Securityincome to be taxed, if that person’s total taxable income reached acertain threshold.
Alan Greenspan, who later became Chairman of the FederalReserve, recommended the change.
For more information, see Related Links, below.
Countries Where Expats Can Avoid Double Taxation On Social Security
The US has Totalization Agreements with 30 countries, with Iceland and Slovenia being the most recent additions. These agreements are in place to reduce dual coverage and taxation for individuals working overseas and to close gaps in benefits coverage for those who may reside in the United States and another country.
While the agreements relieve double taxation for expats residing in those specific countries, there are still many who end up paying into both systems while only receiving one benefit. Agreements are in place with the following countries:
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Social Security Provides Support To Tens Millions Every Year But Some Recipients Could Be On The Hook For Income Taxes On A Portion Of Their Benefits
Prior to 1984, Social Security benefits were not taxed. However, to kept the Trust Fund that supports the program solvent, bipartisan legislation was passed to tax a portion of payments to seniors citizens, surviving spouses and the disabled if they had income above certain thresholds.
At the onset, less than one in ten beneficiaries paid income tax on their benefits. But that percentage has risen over time since unlike benefits the thresholds were not indexed to inflation and in the intervening four decadesno inflation adjustmentshave been made. This meant that as benefits rose, more recipients crossed over the thresholds. Now 56 percent of beneficiaries pay income tax on a portion of their benefits, sometimes as much as 85% if their total income exceeds upper thresholds.
There is no age at which you will no longer be taxed on Social Security payments. However once you are at full retirement age your Social Security payments can no longer be withheld if, when combined with your other forms of income, they exceed the maximum threshold.
How Do I Determine If My Social Security Is Taxable
Add up your gross income for the year, including Social Security. If you have little or no income in addition to your Social Security, then you wont owe taxes on it. If youre an individual filer and had at least $25,000 in gross income including Social Security for the year, then up to 50% of your Social Security benefits may be taxable. For a couple filing jointly, the minimum is $32,000. If your gross income is $34,000 or more , then up to 85% may be taxable.
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Sorry Folks But The Taxation Of Benefits Is Here To Stay
To be crystal clear, there aren’t many people that like this tax, as it’s often viewed as a means of being double taxed . Nevertheless, even with overwhelming public support to shelve the taxation of benefits, it’s not going to happen.
The reason? Social Security is, once again, facing an imminent cash shortfall. Despite what looks to be a healthy trust fund ratio of 289% as of 2018, the Social Security Board of Trustees has forecast that the program’s nearly $2.9 trillion in asset reserves will be completely gone by 2035. If Congress were to fail to act, this would lead to an across-the-board benefit cut for retirees of up to 23%. To just lay this out in a no-nonsense way, Social Security needs all the revenue it can get right now.
If lawmakers were to end the taxation of benefits, it could definitely lead to a modest boost in income for middle-class and upper-income retired individuals and couples. However, it would be removing quite a bit of money from Social Security each year. Last year, the taxation of benefits accounted for $35 billion of the $1 trillion collected, and over the next decade an estimated $596 billion will be collected by the Social Security program solely from taxing benefits. Removing this income from the equation would only speed up the process by which Social Security’s asset reserves would be exhausted, thereby leading to even quicker across-the-board benefit cuts.
Office Of Hearings Operations
On August 8, 2017, Acting Commissioner Nancy A. Berryhill informed employees that the Office of Disability Adjudication and Review would be renamed to Office of Hearings Operations . The hearing offices had been known as “ODAR” since 2006, and the Office of Hearings and Appeals before that. OHO administers the ALJ hearings for the Social Security Administration. Administrative Law Judges conduct hearings and issue decisions. After an ALJ decision, the Appeals Council considers requests for review of ALJ decisions, and acts as the final level of administrative review for the Social Security Administration .
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Is My Social Security Income Taxable The Quick Answer
According to the IRS, the quick way to see if you will pay taxes on your Social Security income is to take one half of your Social Security benefits and add that amount to all your other income, including tax-exempt interest. This number is known as your combined income .
If your combined income is above a certain limit , you will need to pay at least some tax.
The limit is $25,000 if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit for joint filers is $32,000. If you are married filing separately, you will likely have to pay taxes on your Social Security income.
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.
Debunking Some Internet Myths
MYTHS AND MISINFORMATION ABOUT SOCIAL SECURITY- Part 2
Myths and misstatements of fact frequently circulate on the Internet, in email and on websites, and are repeated in endless loops of misinformation. One common set of such misinformation involves a series of questions about the history of the Social Security system.
One Common Form of the Questions:
Q1: Which political party took Social Security from the independent trust fund and put it into the general fund so that Congress could spend it? Q2: Which political party eliminated the income tax deduction for Social Security withholding? Q3: Which political party started taxing Social Security annuities?
Q4: Which political party increased the taxes on Social Security annuities? Q5: Which political party decided to start giving annuity payments to immigrants?
THE CORRECT ANSWERS TO THE FIVE QUESTIONS Q1. Which political party took Social Security from the independent trust fund and put it into the general fund so that Congress could spend it?A1: There has never been any change in the way the Social Security program is financed or the way that Social Security payroll taxes are used by the federal government. The Social Security Trust Fund was created in 1939 as part of the Amendments enacted in that year. From its inception, the Trust Fund has always worked the same way. The Social Security Trust Fund has never been “put into the general fund of the government.”
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
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Ronald Reagans 1983 Amendments To The Social Security Act Of 1935
November 13, 2018By Georgeana Mimms
In 1983, the Reagan Administration amended the Social Security Act to :
As a result, in 2019-2020, the following changes will occur:
Establishing a Trust Fund
Establishing a separate Trust Fund for the American workers contribution to the retirement was a wise move. But it may have been better to designate it as a Reserve Trust Fund. A reserve fund cannot be used for any purpose other than that for which is was specifically designated. Had it been established as a Reserve Trust Fund, Congress would not have been able to borrow from it or use it for any other purpose, such as reducing the debt in the United States General Fund.
Problems with the 1983 Amendments to the Social Security Act of 1935
All of the Reagan amendments were supposed to make Social Security solvent for the, then, upcoming baby boomers. But what the remainder of the 1983 Reagan amendments actually did is:
When Is Social Security Income Taxable
To determine when Social Security income is taxable, youll first need to calculate your total income. Generally, the formula for total income for this purpose is: your adjusted gross income, including any nontaxable interest, plus half of your Social Security benefits.
If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.
Then youll compare your total income with the base amounts for your filing status to find out how much of your Social Security income is taxable, if any.
Youll see that you fall into one of three categories. If your total income is:
- Below the base amount, your Social Security benefits are not taxable.
- Between the base and maximum amount, your Social Security income is taxable up to 50%.
- Above the maximum amount, your Social Security benefits are taxable up to 85%.
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How Workers Can Get Estimates Of Benefits
The Social Security Administration provides benefit estimates to workers through the Social Security Statement. The Statement can be accessed online by opening an online account with SSA called my Social Security. With that account, workers can also construct “what if” scenarios, helping them to understand the effect on monthly benefits if they work additional years or delay the start of retirement benefits. The my Social Security account also offers other services, allowing individuals to request a replacement Social Security card or check the status of an application.
A printed copy of the Social Security Statement is mailed to workers age 60 or older.
In 2021, SSA began producing Retirement Ready fact sheets, available online and as part of the online Statement, that tailor retirement planning information to different age groups .
SSA also has a Benefits Calculators web page with several stand-alone online calculators that help individuals estimate their benefits and prepare for retirement. These include benefit calculators for spouses, calculators for persons affected by the Windfall Elimination Provision or the Government Pension Offset and calculators to determine a person’s full retirement age or the effect of the earnings test on benefits.
SSA also provides a life expectancy calculator to help with retirement planning.