Social Security Benefits
Social Security – Are You Up To Speed With the Changes?
If you’re still working part time and retired, up to 85% of your Social Security benefits may be taxable. This unfair rule was started by Congress during the Reagan administration in 1984. They decided initially that up to 50% of benefits would be taxed again depending on certain income limits.
Many of our seniors who are retiring and beginning to collect Social Security are surprised to learn that their benefits are subject to taxation a second time. It shouldn’t come as a surprise though. When you’re dealing with politicians who throw money away to serve their personal interests, they don’t care where they collect it from or who it hurts.
Then, in 1993, Congress enacted another change making up to 85% of Social Security benefits taxable. This law was signed by President Clinton. There was a tie in the vote to pass this law and Vice President Gore cast the deciding vote to pass it.
Is it any wonder to learn that members of Congress don’t pay into this system? They have their own pension system they pay into and when they retire, they collect a lucrative pension, plus many of them take on a regular job and pay into Social Security for a short time and then collect that on top of their pension. Does anyone see the irony in this double dipping?
What exactly is Social Security tax?
For employees paid and receiving a W-2, it’s a tax paid by the employee and employer to fund the Social Security program. The program pays retirees, based on their retirement age, a certain monthly amount. The program also pays those with various types of disabilities and also those individuals entitled to survivorship benefits.
What’s the tax rate for Social Security?
Currently, the employee pays 6.2% and the employer pays 6.2%. In addition, each one pays 1.45% to fund the Medicare program for a total of 7.65%. For the tax year 2021, the maximum amount of wages taxable for Social Security is $142,800, with no cap for Medicare. Self employed individuals pay the full 15.3% rate, but do get a small discount in the calculation, bringing their effective tax rate to about 14.2%.
Should a retiree have earnings that are higher than the allocated annual earnings limit, their Social Security benefits are reduced until they reach full retirement age.
Social Security Benefits
Monthly benefits are paid to eligible retirees and their spouses. Some recipients elect to take the benefits early at a reduced amount, and if they’re still working, can earn up to $18,960 without losing any of the benefit.
If your earnings are higher that the $18,960 limit, benefits are reduced until you reach full retirement age. In the calculation of the earnings limit, the only types of income that are counted are W-2 earnings and self employment earnings. Pensions and any other type of investment income aren’t counted.
How does Social Security affect taxes
PinThe amount of Social Security benefits that are taxable depends on the taxpayer’s other types of income, and the amounts. If, for instance, the only income a taxpayer has is Social Security, then they aren’t even required to file a tax return.
For a taxpayer filing as single, the income level at which Social Security benefits start to become taxable is $25,000. If the income goes up to $34,000, 50% of benefits are taxable. Once you pass the $34,000 ceiling, you’re now in the 85% taxable range.
For a married couple filing jointly, the income level where benefits start to be taxable is $32,000. Up to $44,000, 50% is taxable, and when you pass the $44,000 number, you’re in the 85% range.
An unmarried retired person, age 65 or older, doesn’t have to file a tax return until taxable type income reaches $14,050. For a married couple filing jointly, a tax return is required to be filed when taxable type of income reaches $27,400.
There are certain situations where Social Security benefits are taxed differently and the entire amount is included in gross income. When a married retired person is filing a separate return, and has lived with the spouse at any time during the year, 100% of the benefits are included in gross income and taxable.
It should be noted that benefits paid to someone as a result of a disability, are tax free.
How do I pay income taxes on Social Security benefits?
In 2021, 37 states do not tax Social Security benefits. The 13 states that do have various ways of handling it. The easiest way to pay taxes on your benefits is to request the Social Security Administration to withhold a certain amount. It should be noted that SSA will only withhold Federal taxes.
If you happen to live in one of the states that tax SSA benefits, you’ll need to pay estimated taxes yourself. Right after the end of the year, the SSA will send you a form, SSA-1099 showing total benefits received, Medicare premiums deducted, and also federal withholding taxes.
Ways to reduce taxes on your Social Security benefits
Senior citizens that have taxable Social Security benefits may be able to reduce the taxes with certain tax credits. These credits have certain rules and conditions associated with them such as being age 65 or over, and income limits.
Postponing your application to Social Security until your full retirement age or more is another way of not paying taxes on your benefits.
In the USA, some of the elderly receive Social Security benefits that are tax free. However, there is usually some sort of reduction associated with this. According to the Social Security Administration, most retirees don’t receive 100% of their normal benefits, and some portion of the benefits are taxed.
We hope that this article has provided some helpful information for you, but if you want to learn more about your benefits, please visit the administration’s website at https://www.ssa.gov
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.
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