Tax season continues and as statements are gathered, income is calculated, deductions are itemized and the annual question arises for Social Security beneficiaries, are my Social Security benefits taxable and by how much?
History Of Social Security
Franklin D. Roosevelt signed the Social Security Act on August 14, 1935. Collecting of the tax began in January 1937 and recipients received a lump sum payment in January 1937. Regular monthly distribution of benefits began in January 1940. Ernest Ackerman was the first American to receive a payment, 17 cents in January 1937.
Since the inception of Social Security, the program has been changed by the government multiple times. Originally, benefits were exempt from taxes. Payroll taxes fund Social Security benefits and when the program was conceived, those taxes were the funding for the program.
However, as income sources increased from private pensions and investment capital gains, the Social Security Administration (SSA) estimates that 15% of a recipients benefits are paid by payroll taxes therefore the benefits should be taxed accordingly.
Cost of Living Adjustments began in 1975, but the main change to how much Social Security benefits are taxed arose from the 1983 Social Security amendments. The amendments continue to be tweaked to reflect the current rates.
How Much Are Social Security Benefits Taxed?
You’ve probably never considered the possibility that your social security benefit may be taxable given the fact that you contributed towards it while working.
Based on the provisions of the Social Security Amendments (SSA),
- Your social security may be tax deductible depending on how much income you earn from other investments.
- If you get income from other sources, then you may have to pay taxes on some of your benefits.
- Your income and filing status affect whether you must pay taxes on your Social Security.
The Federal Government has set some income thresholds beyond which a percentage of your social security benefit becomes taxable. The calculation of the threshold can be complicated as each recipients total income is derived from a variety of sources. All income sources weigh into the calculation. SSA provides detailed information on their website along with worksheets to assist in the calculation.
These thresholds are as follows according to the Internal Revenue Service:
LOWER THRESHOLD
$25,000 – Single, head of household, qualifying widow/widower with dependent children, married filing separately.
$32,000 – Married couples filing jointly
$0 – Married persons filing separately.
UPPER THRESHOLD
$34,000 – Single, head of household, qualifying widow/widower with dependent children, married filing separately.
$44,000 – Married couples filing jointly.
How Tax Is Applied to Social Security Benefits
Examples:
” If your social security is $10,000 and your income from other sources is $30,000, then half of your social security plus your total income from other sources is ($5,000+ 30,000=$35,000). This is $1,000 higher than the upper threshold of $34,000,
You will therefore be taxed on $850 (85%of 1,000)
For married couples filing jointly
- If half of your social security benefit and all your income from other sources do not add up to $32,000, you will not be taxed.
For example, if your joint social security is $10,000 and your income from other sources is $20,000, then half of your social security plus your total income from other sources is ($5,000+ 20,000=$25,500). This is below the lower threshold of $32,000 and non tax deductible.
- If half of your joint social security benefit and all your income from other sources add up to more than $32,000, half of the excess above $32,000 will be subject to a tax of 50%
For example, if your social security is $10,000 and your income from other sources is $30,000, then half of your social security plus your total income from other sources is ($5,000+ 30,000=$35,000) This is $3,000 higher than the lower threshold of $32,000.
You will therefore be taxed on $1,500 (50% of 3,000)
For married persons filing separately who lived together at any time during the year.
Half of your entire social security benefit is taxable under this circumstance.”
Why Is there Not A Yes Or No Answer
The easy answer is that all taxpayers are unique as to how income is derived. So many different factors figure into the calculation of how much, if any, taxes are assessed on Social Security benefits.
The examples given above are a few narrow examples as to what to expect with your income and what percentage of Social Security benefits are taxable. Publication 915 from the I.R.S. gives a thorough explanation of SSA Benefits.
Additionally AARP, many libraries and senior centers throughout the country provide free tax counseling during the tax season.
Recommended Reading:
Does Your Parent Qualify As A Tax Deduction?
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