How To Calculate Tax On Social Security

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What If You Paid Too Much In 2016

How To Calculate Federal Income Taxes – Social Security & Medicare Included

Since many people will be doing their 2016 tax returns in the coming weeks, its worth mentioning the 2016 Social Security taxable wage limit and what happens if you paid too much.

The maximum amount of income that can be taxable for Social Security was $118,500 in 2016, which translates to a maximum Social Security tax of $7,347 per employee. If your employer withheld too much Social Security tax from your paycheck which isnt uncommon for high earners with multiple jobs a refund of the excess can be claimed.

If the excess Social Security tax was the result of multiple employers withholding money from your paychecks, it can be claimed as a credit on your federal tax return . If a single employer withheld too much, you have a couple of options. You can either ask that employer for a refund of the excess and a corrected W-2 or you can claim a refund of the excess with IRS Form 843.

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What Percentage Of Social Security Benefits Are Taxable

The share of your benefits that are taxable depends on your filing status, adjusted income and the Social Security Administrations income minimums that trigger taxes.

None of your benefits are taxable if you earn less than the threshold amount for your filing status. But 50% of your Social Security benefits me be taxable if the following applies:

  • Single filers: Your income is between $25,000 and $34,000
  • Joint married filers: Your income is between $32,000 and $44,000

Lets say youre a single filer who received $30,000 from Social Security benefits and had no other income. Because your income falls between the $25,000 and $34,000 guideposts for a single filer, 50% of your Social Security benefits$15,000may be subject to tax.

And 85% of your benefits are taxable in the following instances:

  • Single filers: Your income exceeds $34,000
  • Joint married filers: Your income exceeds $44,000

So if youre a single filer who received $35,000 from Social Security and had no other income, then 85% of your Social Security benefits$29,750could be taxed.

Benefit Reduction If Taken Before Full Retirement Age

When calculating benefits for early retirement, there are one or two calculations, depending on how early benefits are taken. Assuming a normal retirement age of 67, the age of 62 is the earliest year a person can receive benefits or 60 months early.

The benefit is reduced by 5/9 of 1% for each month before the normal retirement age , up to 36 months. If the number of months exceeds 36, then the benefit is further reduced 5/12 of 1% per month.

For example, lets say that a person wants to retire at 62, leading to a 60-month reduction from the normal retirement age of 67. The first 36 months would be calculated as 36 months times 5/9 of 1% plus 24 months times 5/12 of 1%.

  • First 36 months: 5/9 = .5555 * 1% = .005555 * 36 months = .19999 or 20%*
  • Remaining 24 months: 5/12 = .416666 * 1% = .00416666 * 24 months = .0999 or 10%
  • In other words, benefits would be reduced by 30% if taken at age 62.

*The results were rounded and multiplied by 100 to create a percentage.

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Are Social Security Benefits Taxable

Up to 50% or even 85% of your Social security benefits are taxable if your provisional or total income, as defined by tax law, is above a certain base amount. Your Social Security income may not be taxable at all if your total income is below the base amount.

If youre married and filing jointly with your spouse, your combined incomes and social security benefits are used to figure your total income.

Estimated Social Security Benefits

Social Security Tax Equation

Here is my latest Social Security statement

You have earned enough credits to qualify for retirement benefits. At your current earnings rate, your estimated payment would be:

At full retirement age : $2,600 a month

At age 70: $3,224 a month

At early retirement age : $1,831 a month

These estimates are based on the assumption that I will earn $33,670 a year from now until retirement. Its based on my 2020 earnings.

My income fluctuates wildly over these last few years so the estimates are not accurate. Unfortunately, 2021 is another tough year and my income will be similar to 2020. Well use this online Social Security Calculator to figure out a few more scenarios. This new tool is so good. You can copy and paste your earnings, then use sliders to run the scenario. This is much easier to use than the previous AnyPIA calculator.

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Information You Need To Calculate Your Benefits If You Are Affected By The Gpo

To estimate your future spouse’s, widow’s, or widower’s benefits under the GPO, you need two things:

  • The estimated “gross” monthly amount of your pension from your government job not covered by Social Security.
  • The estimated monthly amount of your Social Security benefit as a spouse, widow, or widower before the effect of GPO.
  • After 9 Years Of Being A Sahd/blogger

    Not at all, life is a dream in early retirement. Even if I stop working completely today, Id still receive $2,446 in Social Security retirement benefit when I turn 67. Thats not bad at all.

    Mrs. RB40 should also receive $1,718 in benefits at 67 if she stops working now. Thats $4,164 per month extra for our household. That should cover our core living expenses. If we keep lifestyle inflation down, were set. Mrs. RB40 isnt quite ready to retire yet so Ill update this once per year.

    Meanwhile, we will keep working to increase our passive income. Once our passive income surpasses our expense consistently, then well be set for life. Any Social Security Benefits will be gravy. My father-in-law uses his Social Security Benefits as a donation fund. Id love to do the same when were 67. I think thats a great idea.

    Have you checked your Social Security statement lately? Are you counting on it to fund your retirement?

    If you made it to the end, go check out this post Are you worth more than you earned? You already have the earning data so might as well figure out if youre worth more than you earned.

    *Sign up for a free account at Personal Capital to help manage your investment accounts and net worth. I log in almost every day to check on my accounts and cash flow. Its a great site for DIY investors. Take charge of your finance so you dont have to depend on Social Security in your old age!

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    How To Calculate Your Social Security Benefit Taxes

    Just because you could owe taxes on up to 50% or 85% of your Social Security benefits doesnt mean youll actually owe taxes on that amount. If you fall into the 50% taxation range, the government says you should owe taxes on the lesser of half of your Social Security benefits or half of the difference between your combined income and the taxation threshold set by the IRS for your tax filing status.

    Examples make this easier to understand, so lets consider an individual who receives $12,000 in Social Security benefits annually and has a combined income of $30,000. Youd calculate the amount theyd owe taxes on this way:

  • Divide their Social Security benefits in half to get $6,000.
  • Subtract the 50% taxation threshold for the individuals tax filing status from their combined income to get $5,000.
  • Divide your result from Step 2 in half to get $2,500.
  • The individual would owe taxes on the lesser of the result from Step 1 or the result from Step 3, in this case: $2,500.
  • Things get even more complicated if you fall into the 85% taxation range. If our individual had a combined income of $40,000 instead and still received $12,000 in annual Social Security benefits, you would calculate how much they would owe in taxes this way:

  • Divide their Social Security benefits in half to get $6,000.
  • Subtract the 50% taxation threshold for the individuals tax filing status from their combined income to get $15,000.
  • Subtract the result in Step 3 from the result in Step 2 to get $6,000.
  • Paying Taxes On Social Security

    How To Calculate Taxes on Your Social Security Benefits

    You should get a Social Security Benefit Statement each January detailing your benefits 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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    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.

    Social Security For Retirement

    The biggest determinant of retirement benefit amount is lifetime earnings since the benefit is based largely on the average of a persons 35 highest-earning years. Because the SS tax is regressive, in retirement, lower-income earners will have a higher portion of their SS retirement benefits paid out in relation to their lifetime earnings than higher-income earners. Another important determinant of benefit amount is the age at which a person applies for retirement benefits.

    SS is designed to replace about 40% of the average American workers pre-retirement income. This value is dependent on each individuals work history higher-income earners will receive larger SS checks than lower-income earners, but the check will be a smaller percentage of their pre-retirement income. SS is not intended to be a sole source of retirement income, and as such, it is advisable to have other forms of income in retirement. This can take the form of anything from rental property income to annuities, mutual funds, or even tax-shielded retirement plans such as a 401 and/or IRAs.

    Full Retirement Age

    When to Apply for Social Security Retirement Benefits

    • The immediate need for cash
    • Life expectancy
    • Relative age, income, and health of spouse

    Social Security Credits

    IRS Tax Tip 2021-66, May 12, 2021

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

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    Video: What Is Social Security Tax

    OVERVIEW

    Note: The content of this video applies only to taxes prepared for 2010. It is included here for reference only. Social security tax is collected by the government to fund the benefits of retirees and those unable to work. Discover how much you owe in social security taxes with help from TurboTax in this video on annual tax filing.

    Fica Tax Withholding Rates

    How To Calculate Social Security Taxable Income

    There are two different rate components:

    • The Social Security withholding rate is gross pay times 6.2% up to that year’s Social Security income cap. This is your portion of the Social Security payment. The employer pays 6.2% with no limit.
    • The Medicare withholding rate is gross pay times 1.45%, although high-income individuals will pay an additional 0.9%. The employer also pays 1.45% with no limit, but they don’t pay any additional tax.

    The total withheld is 7.65% of your gross pay .

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    Who Must Pay Self

    You must pay self-employment tax and file Schedule SE if either of the following applies.

    • Your net earnings from self-employment were $400 or more.
    • You had church employee income of $108.28 or more.

    Generally, your net earnings from self-employment are subject to self-employment tax. If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C to figure net earnings from self-employment.

    If you have earnings subject to self-employment tax, use Schedule SE to figure your net earnings from self-employment. Before you figure your net earnings, you generally need to figure your total earnings subject to self-employment tax.

    Note: The self-employment tax rules apply no matter how old you are and even if you are already receiving Social Security or Medicare.

    The Government Giveth And Occasionally Taketh Away: Ssdi And Federal Income Tax

    Social Security beneficiaries may have questions about whether their retroactive benefits and/or their ongoing monthly benefits are taxable. This article gives general income tax guidance and should not be used as the basis for tax advice in individual cases. This is a broad overview with examples. This article only analyzes SSDI and not Supplemental Security Income . The composition of taxable income for each individual is unique and the permutations of taxation are myriad depending on a range of variables including income source, household composition, and timing. This article only concerns federal taxation. Most states do not tax SSDI. However, that is not discussed here.

    Though an investment in hiring a tax professional may seem steep for an individual receiving SSDI, it may pay for itself many times over in tax savings or in prevention of emotional and financial disturbance arising from an IRS audit. NOSSCR cannot give tax advice and we recommend that your client always consult a tax professional.

    When an individual receives a retroactive payment, SSA is required to send a 1099 form by February 1 of the following year, specifying how much of the Social Security benefit received in the retroactive payment was really a payment for a prior year . The 1099 form also lists the amount of the attorney fee paid. These 1099 forms are often inaccurate, and the taxpayer should double check all numbers with his or her award notice.

    The Myth

    The Math

    SSDI Attorneys Fees

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    Exemptions To The Government Pension Offset

    Generally, we wont reduce your Social Security benefits as a spouse, widow, or widower if:

    • Your government pension is not based on your earnings.
    • Your government pension is from a federal, Civil Service Offset, state, or local government job where you paid Social Security taxes and at least one of the following applies:
      • You filed for and were entitled to spouse, widow, or widower benefits before April 1, 2004.
      • Your last day of employment at the job was before July 1, 2004.
      • You paid Social Security taxes on your earnings during the last 60 months of government service.

    There are other cases where the GPO does not apply. If you need more information, please read our “Government Pension Offset” factsheet.

    How Raising The Wage Base Could Work

    How to Calculate Social Security Tax

    Once a worker crosses the threshold of paying Social Security taxes on the first $147,000 of their annual earnings, their paychecks are no longer subject to those levies.

    As a result, workers who are above the earnings threshold may pay Social Security payroll taxes for part of the year only.

    A lot of people dont even know there is a maximum, and when they find out, they think the law should be changed so that everybody pays in all year, Altman said.

    A Medicare tax of 1.45% also applies to wages. Combined with Social Security, this represents a 7.65% tax paid both by employees and employers and is known as FICA, which stands for the Federal Insurance Contributions Act.

    Notably, there is no wage limit for the Medicare tax, after Congress did away with it starting in 1994.

    Today, lawmakers could choose to make the same change to Social Security. They could also choose to increase the tax rate from 6.2%.

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    Control Your Taxes Now & Later

    The longer you wait to claim Social Security benefits, the better chance you’ll have to boost the overall tax efficiency of your retirement income plan. Here’s how.

    Drawing down traditional tax-deferred assets before collecting Social Security can enable you to control both your current and future taxes.

    The amount you withdraw from a traditional IRA, for example, lowers your account balance, which may reduce your future required minimum distributions .

    Since your RMD is considered ordinary income, having smaller distributions while you’re collecting benefits may reduce the taxes on your benefitsor keep you from paying taxes altogether.

    In addition, managing your retirement income in this way can also help you qualify to pay lower Medicare parts B and D premiums, which are income-based.

    How Much Tax Do I Have To Pay To Qualify For Social Security Benefits

    Figuring out if you qualify for traditional Social Security retirement benefits isnt as simple as making sure youve paid a certain dollar amount of Social Security taxes. Instead, the system uses Social Security credits to determine eligibility. To qualify for traditional Social Security retirement benefits, you must have earned 40 Social Security credits.

    Starting in 1978, you could earn up to four Social Security credits per year by paying Social Security taxes. You earn credits based on your wages and self-employment income for the year.

    In 2021, you earn one credit for each $1,470 in covered earnings. To earn the full four credits possible in 2021, you must earn at least $5,880. The amount to earn one credit may change from year to year and was lower in years before 2021.

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    Place Some Retirement Income In Roth Accounts

    Contributions to a Roth IRA or Roth 401 are made with after-tax dollars. This means theyre not subject to taxation when the funds are withdrawn. Thus, the distributions from your Roth IRA are tax-free, provided that theyre taken after you turn 59½ and have had the account for five or more years. As a result, the Roth payout wont affect your taxable income calculation and wont increase the tax you owe on your Social Security benefits. Distributions taken from a traditional IRA or traditional 401 plan, on the other hand, are taxable.

    The Roth advantage makes it wise to consider a mix of regular and Roth retirement accounts well before retirement age. The blend will give you greater flexibility to manage the withdrawals from each account and minimize the taxes you owe on your Social Security benefits. A similar effect can be achieved by managing your withdrawals from conventional savings, money market accounts, or tax-sheltered accounts.

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