Taxation of Social Security Benefits

The Social Security program has provided benefits for millions of people in its eighty-five years of existence. Political compromises have kept the program going as the cost of living has increased faster than wages. One of these compromises resulted in the assessment of federal income taxes on some Social Security benefits. This only applies to taxpayers with income above a threshold amount. Even if an individual’s income is above the threshold, only part of their Social Security benefits are taxable. Not all benefits payable by the Social Security Administration (SSA) are subject to federal income tax, and our Los Angeles tax advisors can explain the extent to which tax rules apply.

Types of Social Security Benefits

The SSA is an independent federal agency, meaning that while it is part of the Executive Branch of the federal government, it is not part of a federal executive department. Much of the funding for SSA programs comes from payroll taxes. The agency administers numerous benefit programs, including:
Retirement benefits, which are available to people who have made a minimum number of payments into the program through their payroll taxes, and who have reached the age of sixty-two;
Social Security Disability Insurance (SSDI), which helps eligible individuals who are unable to support themselves because of an injury or medical condition;
Survivors benefits, which provides assistance for family members of SSA beneficiaries; and
Supplemental Security Income (SSI), which pays benefits to elder individuals, blind individuals, and individuals with disabilities.

Most of these benefits are taxable if the individual meets the income threshold. Dependent or survivor benefits received by a child are usually not taxable, unless the child has sufficient income to file their own income tax return. SSI benefits are not subject to federal income tax under any circumstances.

Taxation at Different Income Levels

Congress first imposed income tax on SSA benefits in the Social Security Amendments of 1983. A taxpayer’s “gross income” includes fifty percent of social security benefits they receive. Benefits are not subject to any federal income tax if a taxpayer’s gross income, including social security benefits, is less than $25,000, or $32,000 for a married couple filing a joint return.

If an individual’s gross income is at least $25,000, but less than $34,000, they must pay federal income tax on fifty percent of the social security benefits they receive. For married couples filing jointly, the threshold amounts are $32,000 and $44,000. An individual with gross income of $34,000 or more, or a married couple filing jointly with gross income of $44,000 or more, must pay tax on eighty-five percent of their benefits.

Taxpayers can make quarterly estimated tax payments, or they can ask the SSA to withhold taxes from their benefit payments.

Examples

Suppose an individual receives $1,000 per month from the SSA, and has other income totaling $1,800 per month. Their annual gross income, for tax purposes, would be $27,600 ($21,600 in other income, plus half of the $12,000 from the SSA). They would pay tax on fifty percent of their benefits, or $6,000.

Another individual receives $2,000 per month from the SSA, and has $3,600 per month in other income. Their annual gross income, using the same formula, would be $55,200. They would therefore pay tax on eighty-five percent of their $24,000 per year in benefits, or $20,400.

If you need assistance with a tax-related problem in California, the Enterprise Consultants Group’s tax advisors can answer your questions and help you understand your rights. Please contact us today online or at (800) 575-9284 to schedule a consultation with a member of our team.

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