If you're planning for retirement, you may be wondering if you have to pay taxes on your Social Security benefits. Some people do have to pay taxes on a portion of their Social Security income. For many people, Social Security is a significant portion of their retirement income, so paying taxes on it can be a financial burden. This article will go over who has to pay taxes on their Social Security and how much.
What Is Social Security Income?
Social Security was designed to give older Americans a reliable income source after retirement. In the 1930s, America was facing the worst economic downtown in modern history, the Great Depression. In 1935, President Roosevelt signed the Social Security Act. This was part of the New Deal, a group of programs, public works projects, and initiatives intended to help offset the devastating effects of the Great Depression.
Social Security isn't just for retired people. It also helps workers with disabilities and families whose spouse or parent has died. Still, most people who receive Social Security are retired workers and their families. The purpose of Social Security is to replace a percentage of your income based on how much you've earned over your lifetime. How much you'll receive in Social Security depends on how much you've earned and when you choose to start receiving benefits.
If you start receiving benefits at full retirement age, your benefits could be as much as 75% of your average lifetime earnings if your income was very low or as little as 27% if your income was very high. If you start receiving benefits before the full retirement age, you'll receive less. If you wait until after your full retirement age, you'll receive more.
In addition to retired workers, you may also be eligible for Social Security benefits if you:
- Have a qualifying disability
- Are a spouse or child of someone who receives benefits
- Are a divorced spouse of someone eligible for benefits
- Are a spouse or child of a worker who died
- Are the divorced spouse of a worker who died
- Are the dependent parent of a worker who died
What Is Full Retirement Age for Social Security Benefits?
If you were born in 1960 or later, your full retirement age is 67. If you were born before then, your full retirement age is as follows:
- For people born between 1943 and 1954: 66
- For people born in 1955: 66 and 2 months
- For people born in 1956: 66 and 4 months
- For people born in 1957: 66 and 6 months
- For people born in 1958: 66 and 8 months
- For people born in 1959: 66 and 10 months
Is Social Security Taxable?
Social Security is taxable over a certain amount. If your total income is $25,000 or less as an individual or $32,000 or less as a married couple, you don't have to pay taxes on your Social Security. If your total income is more than that, you have to pay taxes on a certain percentage of your Social Security benefits. No matter how much you make, you don't have to pay tax on more than 85% of your Social Security.
Calculating Social Security Tax
If you do have to pay tax on your Social Security benefit, the amount will depend on your total income from all sources. For 2021, if your income as an individual is between $25,000 and $34,000, you'll pay taxes on up to 50% of your income from Social Security. If your total income is more than $34,000, you'll pay taxes on 85% of your Social Security.
If you're married and filing jointly, you'll pay taxes on up to 50% of your Social Security if your total income is between $32,000 and $44,000. If your total joint income is over $44,000, you'll pay taxes on 85% of your Social Security.
When you're calculating the exact amount you need to include in your taxable income, it's the lesser of either:
- Half of your annual Social Security benefits
- Half of the difference between your combined income and the Social Security base amount
For example, if your total annual Social Security benefit is $18,000, half of that is $9,000. If you're filing individually, and your total income is $28,000, then half of the difference between your income and the Social Security base is $1,500 ($28,000 − $25,000 = $3,000, $3,000/2 = $1,500). So you would only be taxed on $1,500, since that's less than half of your Social Security benefit.
How Can You Increase Your Social Security Benefits?
If you're looking to maximize your Social Security benefits, here are some options to consider:
Work for at Least 35 Years
Your Social Security benefits are calculated based on the average of the 35 years during which you earn the most. If you don't work for 35 years, 0 will be included for every year less than 35, which will decrease your average income significantly.
Work as Long as You Can
You can start claiming Social Security benefits at age 62, but your benefits will be permanently reduced if you do. By working until your full retirement age, you'll receive your full benefit. If you delay claiming benefits until age 70, you'll earn even more. Your benefits will increase by 8% for each year you delay claiming them until age 70. There's no additional benefit to waiting longer than age 70.
Check Into Spousal Payments
If you're married, or were married, spousal payments may increase your Social Security benefits. Spouses can claim up to 50% of their spouse's benefit if it's more than your benefit. This can be a good option for couples where one spouse stayed home for much of the marriage. If you're divorced but were married at least 10 years, you may be able to claim spousal payments based on your ex's work history.
Claim Survivor's Benefits
When a spouse passes away, the surviving spouse may be able to claim survivor's benefits. The spouse who survives can inherit their spouse's Social Security benefits. If the spouse who passed away earned $2,000 and the surviving spouse only receives $1,500, they may be able to increase their benefit to $2,000.