You may have to pay Tax on Social Security Benefits
Most retirees have paid into the Social Security system for years, and therefore feel entitled to claiming Social Security benefits. What most retirees don’t realize is that they may have to pay tax on Social Security benefits each year based on tax filing status and total income. As history shows, there wasn’t always a tax on Social Security benefits.
Generally, most individuals that are employed in the US pay taxes on their earned income each year. The Social Security System is funded by a portion of these taxes. Once you have paid into the system for a minimum of 40 quarters (4 per year), you qualify for the minimum Social Security Retirement Benefits, of which you can start collecting between the ages of 62 and 70. Depending on tax filing status and total income, you may have to pay tax on Social Security benefits once you start collecting.
To do a quick provisional income computation to determine if you will pay tax on Social Security benefits, add up your Total Income + Tax Exempt Income + ½ Social Security and compare that figure to the base amount listed in the chart below.
Tax on Social Security Benefits by Amount of Provisional Income
Single* Married Filing Jointly Percentage of Benefit Taxed
$25,000 or less $32,000 or less None
Over $25,000 to $34,000 Over $32,000 to $44,000 Up to 50%
Over $34,000 Over $44,000 50% to 85%**
You may have to pay tax on Social Security if your provisional income is above the thresholds of $25,000 for single tax filing and $32,000 for joint tax filing. Depending on the amount of provisional income, anywhere from 50% to 85% of Social Security benefits can be counted as taxable income.
As history shows, there wasn’t always a tax on Social Security benefits. When Social Security was enacted in 1935 it was free from federal income tax and it stayed that way for almost 50 years. In 1983, when faced with huge Federal deficits, Congress and President Reagan amended the Social Security act to allow up to 50% of Social Security benefits to be subject to Federal Income Taxes. In 2001 Congress and President Clinton, with the Omnibus reconciliation act, amended the Social Security Act again which added a second threshold to allow up to 85% of Social Security benefits to be subject to Federal Income Taxes.
Whether you are currently collecting or plan to collect Social Security Benefits in the near future, it is important to determine if you are eligible to reduce or eliminate tax on Social Security benefits.
Resource box: Everything you wanted to know about tax on social security or just simply social security you can get the info by clicking on the links.
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