Social Security: Calculation and History of Taxing Benefits


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In graphical form not updated for [7] , assuming the non-SS income comes from tIRA withdrawals,. There is no While most states do not tax social security benefits shaded blue in figure; along with green shaded states which do not impose income tax , six states tax benefits to the extent they are taxed at the federal level shaded lavender , while eight states exempt social security benefits from taxation subject to limits shaded yellow.

First, Worksheet A is used to determine if your benefits are taxable. If so, Worksheet 1 through 4 select one based on filing method is used to calculate the tax. Retrieved 18 November Retrieved 31 January Money Mustache Community , viewed Nov. Retrieved from " https: Tax considerations Social Security. Pages requiring annual tax updates. Navigation menu Personal tools Log in. Views Read View source View history. The remaining seven states have no personal income tax. In and earlier, Nebraska followed federal taxation of Social Security benefits.

Because the income thresholds to determine the taxation of Social Security benefits are not indexed for inflation or wage growth, the share of beneficiaries affected by these thresholds increases over time. Table 4 shows CBO's estimates for tax year of the number of Social Security beneficiaries and of the number and share of beneficiaries affected by the taxation of Social Security benefits, by level of income. The percentage of Social Security beneficiaries affected increases sharply with income.

Income is defined as adjusted gross income plus statutory adjustments, tax-exempt interest, and nontaxable Social Security benefits. Number of Social Security beneficiaries includes beneficiaries under and over the age of Table 5 shows how the share of benefits that are taxed increases with income. Proceeds from taxing benefits at higher rates are credited to Medicare's Hospital Insurance HI trust fund.

Because the income thresholds used to determine the share of benefits that is taxable are not indexed for inflation or wage growth, income taxes on benefits will become an increasingly important source of tax revenues for Social Security and Medicare. Until , Social Security benefits were exempt from the federal income tax.


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The exclusion was based on rulings made in and by the Department of the Treasury, Bureau of Internal Revenue the predecessor of the Internal Revenue Service. The Bureau ruling on Social Security payments viewed benefits as being for general welfare and reasoned that subjecting the payments to income taxation would be contrary to the purposes of Social Security.

This was in sharp contrast to then-current rules for retirement benefits under private pension plans, the federal Civil Service Retirement System CSRS , and other government pension systems. Currently and as in , under Social Security the worker's contribution to the system is half of the payroll tax, officially known as the Federal Insurance Contributions Act FICA tax.

The amount the worker pays into the Social Security system in FICA taxes is not subtracted to determine income subject to the federal income tax, and is therefore taxed. The employer's contributions to the system are not considered part of the employee's gross income, and are deductible from the employer's business income as a business expense. Consequently, neither the employee nor the employer pays taxes on the employer's contribution. The Advisory Council on Social Security concluded that because Social Security benefits are based on earnings in covered employment, the ruling was wrong and that the tax treatment of private pensions was a more appropriate model for tax treatment of Social Security benefits.

Because of the administrative difficulties involved in determining the taxable amount of each individual benefit and to avoid "taxing more of the benefit than most people would consider appropriate," the council recommended instead that half of everyone's benefit be taxed. They justified this ratio as a matter of "rough justice" and noted that it coincided with the portion of the tax the employer's share on which income taxes had not been paid.

Taxation of Social Security benefits - Bogleheads

The commission did not, in its final report, include a recommendation to tax Social Security benefits. The commission acknowledged that the proposal had a "notch" problem, in that people with income at the thresholds would pay significantly higher taxes than those with only one dollar less, but trusted that it would be rectified during the legislative process. In enacting the Social Security Amendments P. Applying the tax rules for private and public pensions presents practical administrative problems. Determining the proper exclusion would be complex for several reasons, including the difficulty of calculating the ratio of contributions to benefits for each individual when several people may receive benefits on the basis of the same worker's account.

Because the thresholds and definition of provisional income did not change, the measure would only affect recipients already paying taxes on benefits. Doing so also avoided possible procedural obstacles budget points of order that can be raised regarding changes to the Social Security program in the budget reconciliation process. President Clinton signed the measure into law as part of P. Although other changes in tax law have since affected the amount of taxes paid on Social Security benefits, there have been no direct legislative changes regarding taxation of Social Security benefits since A Social Security beneficiary may receive a lump sum distribution of benefits owed for one or more prior years.

In either case, the additional taxable benefits are included in taxable income for the current year. In computing the taxable portion of benefits in prior years, some income sources generally excluded from the provisional income calculation are included. Sometimes a Social Security beneficiary must repay a prior overpayment of benefits. In this case, the calculation of taxable Social Security benefits is based on the net benefits—gross benefits less the repayment—even if the repayment is for a benefit received in a previous year.

For married taxpayers filing a joint return, net benefits equal the sum of the couple's Social Security gross benefits less the repayment. If, however, the repayment results in negative net Social Security benefits, there are two consequences: For individuals under the full retirement age, Social Security benefits are reduced by a portion of any workers' compensation payments or payments from some other public disability program received by the individual. Workers' compensation is generally not taxable.

Any reduction in Social Security benefits due to the receipt of workers' compensation is still considered to be a Social Security benefit, however, so income taxes are computed based on the full unreduced benefit amount. Citizenship is not required for receipt of Social Security benefits.

Taxation of Social Security benefits

Nonresident aliens, under IRS definitions, may receive benefits provided they have engaged in covered employment and otherwise meet eligibility requirements. The IRS defines a nonresident alien as a noncitizen who 1 is not a lawful permanent resident this is known as the Green Card Test and 2 has been physically present in the United States for fewer than 31 days in the previous calendar year and days in the previous three-year period, counting all the days in the calendar year and a portion of the days in the two previous calendar years this is known as the Substantial Presence Test.

However, there are a number of exceptions to this general rule on the basis of tax treaties such that nonresident aliens or U. Social Security benefits subject to U. In general, withholding for a wage earner is based on the estimated income taxes for a full year of earnings at the periodic weekly, bi-weekly, monthly, etc.

Taxable Social Security benefits, and the associated taxes, are based on the amount of non-Social Security income earned by a recipient during the tax year. The Social Security Administration, without knowledge about the amount of other income received by a beneficiary, is unable to properly determine the amount of taxes that should be withheld from Social Security benefits.

Like other taxpayers, Social Security recipients can make quarterly estimated income tax payments.

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An amendment to Section of the Social Security Act allowed this voluntary tax withholding from Social Security benefits. Nonresident aliens residing outside the United States are subject to different tax withholding rules. Tier I railroad retirement benefits are paid to a qualified railroad retiree who has met the quarterly work requirements for Social Security benefit eligibility. The retiree receives Social Security benefits based on the work history that qualified the retiree for Social Security benefits, and the retiree receives Tier I benefits based on both the Social Security and railroad work histories.


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The actual Social Security benefits received are subtracted from this calculation of Tier I benefits to get actual Tier I benefits. In this report, references to Social Security benefits generally also apply to Tier I benefits. For additional information on calculating taxable Social Security benefits, see U. Adjusted gross income is the main measure of income used when computing income taxes. The Internal Revenue Service refers to provisional income as modified adjusted gross income. See Publication for details on the sources of income included in computing provisional income. Interest on qualified U.

Information on current monthly benefit payments is available in the Monthly Statistical Snapshot at http:

Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits
Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits
Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits
Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits
Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits
Social Security: Calculation and History of Taxing Benefits Social Security: Calculation and History of Taxing Benefits

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