Designed to provide economic security for retirees, disabled individuals and the families of the retired, disabled or deceased workers, Social Security is considered a pay-as-you-go program. According to the National Academy of Social Insurance (NASI), approximately 169 million Americans currently pay taxes and 61 million Americans receive monthly Social Security benefits. Moreover, Social Security income is received by about one in four families currently.
It is important to understand the tax ramifications of Social Security income although millions of Americans currently pay or have already paid Social Security taxes. Social Security is indeed taxable but only to a certain extent. You can file your federal and state tax returns correctly and avoid potential tax penalties if you know the ins and outs of Social Security income and its tax implications.
You will have to pay income taxes on your Social Security benefits if you file a federal tax return as an “individual” and your “combined income” exceeds $25,000-- according to the Social Security Administration (SSA). Or, if you and your spouse are filing jointly and you have a total combined income of $32,000 or more, you are required to pay income tax on your Social Security benefits. You likely will have to pay taxes on your Social Security benefits too if you are married and file a separate tax return.
In calculating tax liability on Social Security income, the IRS set some limits in place for the tax year 2017. These are:
After adding the percentage between the employer and an employee, the Social Security tax rate has 12.4 percent in total after summing up the percentage of the two factors which is 6.2 percent respectively. Additionally, in 2017, $127,000 was the maximum annual Social Security earnings for a taxpayer and $7,885.40 was the maximum annual Social Security tax for a taxpayer.
For the tax year 2018, the limits for calculating tax liability on Social Security changed by the IRS. For that year, an increase of 7 percent to $128,400 as of the maximum annual taxable Social Security earning for a taxpayer. Meanwhile, an increase of $74.40 from 2017, an amount of $7,960.80 should be paid by the taxpayer for the maximum annual Social Security tax.
Your Social Security income has the same federal taxes as your standard income that you should pay. You will be taxed at a rate of $0.50 for every dollar on your Social Security income if you are filing taxes as an individual and earned more than $25,000 in the year 2017. On the other hand, you will be taxed at a rate of $0.85 for every dollar over $34,000 on Social Security income if you earned more than $34,000 the year before and you are filing taxes as an individual.
There are free tools that are available to help you calculate your taxes since it is indeed tricky to determine the federal taxes on your Social Security income at first.
Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, and West Virginia are thirteen states that states tax Social Security benefits exist. How Social Security is handled differs in every state. So better check yours to make sure. You probably won’t have to pay state taxes on your benefits if Social Security is your only source of income.
It is better to be knowledgeable about Social Security and how it is related to state and federal taxes because if you are, you can avoid having a costly, time-extensive filing mistake.
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