ARE THERE TAXES ON SOCIAL SECURITY FOR SENIORS?

In the advent of the legislation passed by Congress in 1983, the full-retirement age set by social security has been increasing gradually. As a result, retirees aged 65 to 67 years get to enjoy social security benefits tax-free. In the past, the full retirement age was 65 with people, who preferred an early retirement, enjoying the benefits after attaining 62 years.

The benefits are subject to a reduction as the retirees only receive 80% of the full amount of benefits. However, for retirees who are still working, a part of their benefit is subject to taxation. The IRS adds these earnings to half of your social security benefits; if the amount exceeds the set income limit, then the benefits are taxed. This discussion gives more insight on taxes on social security benefits for seniors.

What Is Social Security Tax?

What-Is-Social-Security-Tax

It is a tax charged on the employer and the employee to fund the social security program. It is collected in the form of self-employment tax or payroll tax. Employers usually withhold the tax from the employee’s paycheck and remit it to the relevant government authority. This amount is used to pay retirees and people who have various disabilities. Social security tax is also used to support people who are entitled to survivorship benefits.

Social Security Tax Rate

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Tax Rate Used by Employers in 2017

Employers used a rate of 12.4% in 2017, where the employee contributes half (i.e. 6.2% and the employer pays the other half). The tax is assessed on all types of income: wages, salaries, and bonuses with an income limit of $127,000. However, when it comes to self-employed people, the IRS regards them as both the employer and employee hence liable for the whole 12.4% social security tax.

Social Security Benefits

Social Security Benefits

The benefits are paid monthly to retirees and their spouses after attaining the full retirement age if, during their working years, they paid the social security tax. Some people, however, prefer taking early retirement where social security deducts different amounts of income until the subjects attain the full retirement age.

If the retiree earns an income that exceeds the annual earnings limit, then the social security benefits are reduced until they attain the full retirement age. Note that investment income is not included in the annual taxable earnings. The only income involved comprises of wages or a salary earned from self-employment or when working for someone. It begs the question: How much of these additional earnings are deducted for early retirees?

  • 2017 Social Security Limit Set to Annual Earnings of $16,920
  • 2015 & 2016 Social Security Limit Set to Annual Earnings of $15,720

2017 saw the social security limit was set at annual earnings of $16,920, which means that the senior can earn up to this amount while receiving all his social benefits. It is an increase from the previous years—2016 and 2015—when the limit was $15,720. However, several rules apply based on whether you earn the income before, during, or after attaining the full retirement age:

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Before Attaining the Full Retirement Age (FRA)

In case the retiree is collecting social security benefits and earning more than the set limit, the social security takes back a dollar for every $2 that exceeds the limit. It means that if a senior is earning more than the allowed amount in a year, the social security benefit is reduced the following year. For example, retirees aged between 62 and 65 earning $3000 more than the $16,920 limit should expect half of the additional amount to be cut from his benefit. As such, if they have been receiving $750 every month in 2016, they will not receive any social security payments for the first two months of 2017.

The deduction applies to any year before attaining the full age of retirement and on incomes earned after the retiree starts receiving their social security benefits. Additionally, income earned the month before the retiree begins to collect their social security benefits is not subjected to deductions if they work for less than a year.

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During the Year You Attain FRA

In this scenario, social security only deducts a dollar for every $3 earned that exceeds the set annual limit during the year you attain the full retirement age. However, a different limit applies the year the retiree reaches FRA. In 2017, for example, the limit was set at $44,800 which was a $3000 increase from 2016. The limit also applies to earnings the retiree receives before the month you reach full retirement age.

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After Attaining FRA

No annual earnings limit apply once the retiree attains the full retirement age, you can earn as much as you like without getting your income deducted. However, the benefits may be subjected to income taxes as discussed below.

When Should Seniors File Returns?

When-Should-Seniors-File

Taxes on social security benefits are based on the retiree’s income. If social security benefits are the only source of income for the senior, then there is no need of filing a tax return. As of 2017, retirees without spouses and have attained the required 65 years should file an income tax return if the gross earnings are more than $11,850. Seniors living on social security benefits, however, should not include the amount in this gross income. If the benefits make up your entire income, then your gross income for tax computation is equal to zero.

Unmarried retirees who have additional incomes liable to tax should determine if the amount exceeds $11,950 for tax computation. Married retirees filing their return jointly, on the other hand, may have their social security benefits taxed if they are earning more than $23,000. If one of the spouses is below 65 years of age, then the threshold amount reduces to $ 22,050.

In some instances, retirees are required to include the social security benefits in their gross income. For example, a married retiree who files a separate tax return but lives with his spouse at any time during the year, then all his benefits are considered gross income that requires them to file taxes on social security benefits. Additionally, a portion of the benefits is included in the gross income irrespective of the retiree’s filing status, where the sum of half the social security benefits and other income (this includes tax-exempt interest) goes beyond $25,000 for unmarried seniors and $32,000 for married retirees. Note that benefits received as a result of disability are tax-free.

The Taxable Amount Of Social Security Benefits

The Taxable Amount Of Social Security Benefits

Additional incomes from other sources affect the taxable amount of your social security benefits. The amount ranges from 0–85% based on your combined income. The IRS calculates this figure by adding half of the annual social security benefit, any non-taxable interest, and the federal adjusted gross income. For the unmarried, the tax rate ranges from 1–50% of the benefit if their combined income lies between $25,000–$34,000 and $32,000–$44,000 for spouses filing their returns jointly. If the combined incomes exceed these set limits for both singles and those who are unmarried, the taxable portion of your benefit ranges between 51–85%.

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Are social security benefits for the disabled taxable?

Disabled people are not liable to pay state or local taxes on their social security disability benefits. However, if the other incomes and social security disability benefits exceed the income guidelines, then the individual should report the expected amount for federal tax purposes.

How To Pay Taxes On Social Security Benefits

The state requires payments for taxes on social security benefits to be made on April 15. Retirees can make estimates for the tax payments throughout the year or ask the Social Security Administration (SSA) to withhold the taxes from their monthly checks. Seniors who choose the latter option should fill IRS Form W-4V to request the authorities to withhold their taxes or use the Voluntary Withholding Request form available online.

The Form Provides Four Options as to How You Want Your Money Withheld From Monthly Payments:

2017 Social Security Annual Earnings Limit

Retirees aged 65 to 67 years get to enjoy social security benefits tax-free.

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The Social Security Administration sends a Social Security Statement (SSA-1099) each January, which details the actual amount you have received in the form of benefits the previous year. The SSA also provides retirees with the option to file returns for the benefits without receiving payments. This way you also get to accumulate delayed retirement credits, which increase once you start receiving the benefits. A senior, who attains the full retirement aged 66 or 67, can delay receiving payments until 70. As a result, they increase the benefits by 8% every year they delay the payments.

How To Reduce Taxes On Social Security Benefits

How To Reduce Taxes On Social Security Benefits

Seniors with incomes that exceed the set limit are liable to pay tax. However, they can reduce the taxable amount through tax credits for the elderly and disabled as long as they have reached 65 and income from other sources does not exceed the set limit. Tax credits are more helpful to people who owe tax to the IRS. You can also avoid taxes on social security benefits by postponing receipt of the benefits until you attain the full retirement age.

Conclusion

To sum up, we can say that seniors receive social security benefits tax-free. However, these benefits are usually subjected to some form of reduction because most retirees never receive 100% of their benefits. There is also an exception where an elderly person’s social security benefits may be taxed. If their incomes exceed a particular set limit, then their social security benefits are liable to taxation.

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