Don't Mess With Taxes

Keeping track of your finances when you're older can alert you to the possibility that you might owe tax on some of your Social Security benefits.

Most of us look forward to retirement. Some of us also get a tax shock once we start collecting Social Security.

Some of our federal retirement benefits, in some cases as much as 85 percent of our annual payout, could be subject to federal taxation.

Not only is that tax an unwelcome surprise to older taxpayers, it also has become part of the current presidential campaign

“Seniors should not pay tax on Social Security,” wrote Donald J. Trump in a July 31 post on his Truth Social platform. He’s repeated the tax change in interviews and during rallies, most recently at his event today in Asheville, North Carolina.

Here’s a look at the current income tax on Social Security benefits that the GOP’s presidential nominee wants to end, as well as the tax’s history, and what eliminating it could mean.

Tax on some, but not all: All U.S. workers pay into the Old-Age, Survivors, and Disability Insurance (OASDI), which is the official name for Social Security.

The amount are collected either through payroll taxes if they are employees or by making self-employment tax payments when they file their returns. When we retire, we get some of that Federal Insurance Contributions Act (FICA) tax money back as Social Security monthly benefits.

If you rely totally on Social Security to cover your costs in your golden years — and yes, some people do scrape by this way — then you most likely won’t have to worry about taxes.

But if you have other funds, either earned or unearned, to supplement your Social Security amounts, such as savings or investments or a job, you likely will end up paying income tax on a portion of your federal retirement benefits.

In these cases, up to 50 percent of your Social Security benefits could be taxable. In some situations, the ordinary tax rate could apply to 85 percent of your benefits.

Figuring the tax amount: Determining how much you owe starts when you get your annual Form SSA-1099, Social Security Benefit Statement. This is the retiree version of a W-2. It is issued each January, and shows the amount of benefits you received (box 5 below) in the previous year.

See more tax forms and more about them at Tax Forms 2024.

 
You take one-half of that benefit amount and add it to any other income — this typically is includes wages and earnings from self-employment, taxable pensions, interest, and dividends — along with any tax-exempt interest income you received.

This sum is your combined income for Social Security taxation purposes. When your combined income is more than a base amount based on your filing status, you're going to owe some tax on your benefits.

Base amounts, taxable percentages: The Social Security base amount that triggers at least some taxable of Social Security benefits is $25,000 for individual taxpayers and $32,000 for married filing jointly taxpayers.

If your combined income for your filing status exceeds these base amounts, you’ll owe tax on 50 percent of your Social Security benefits.

If you make more beyond your monthly federal retirement check, they you’ll owe more taxes.

Individual taxpayers whose combined income exceeds $34,000 will owe tax on up to 85 percent of their Social Security payments. The 85 percent of benefits income tax trigger for married couples filing a joint is more than $44,000.

And, in another case where joint filing gets a better tax result, if you're married but you and your spouse file separate 1040s, you probably will pay taxes on your benefits.

Married filing separately filers who did not live with their spouses at any time during the tax year have the same base amount as individual filers.

If, however, spouses lived together at any time during the tax year but just didn't want to file together, the base amount is zilch. That's right, zero dollars.

Final calculations, possible withholding: You figure your taxable Social Security amount using your tax software or the worksheet in the Form 1040 instructions (page 32). IRS Notice 703 also offers guidance, as shown from the relevant excerpt below.

See more tax forms and more about them at Tax Forms 2024.

 
The Interactive Tax Assistant on IRS.gov also can help you answer the tool’s question, Are My Social Security or Railroad Retirement Tier I Benefits Taxable? If the answer is yes, it can help you see just how much of the amount will be taxed.

If you discover (or even just think) you are going to owe tax on your Social Security benefits, you can avoid (or reduce) a tax bill when you file your return by having taxes withheld from your retirement payments.

You can choose to have 7 percent, 10 percent, 12 percent, or 22 percent of your total benefit payment withheld. Just complete Form W-4V, Voluntary Withholding Request, and file it with the Social Security Administration.

If you don’t want smaller monthly payments, then you’ll need to cover your expected Social Security benefits tax amounts by making estimated tax payments four times a year to cover them.

Social Security benefits tax history: Around 71 million people get benefits from programs administered by the Social Security Administration (SSA). This includes both retirement and disability payments.

About 40 percent of those recipients, both retirement and disability recipients, must pay federal income taxes on their benefits, according to the SSA.

This hasn’t always been the case.

Social Security benefits weren’t taxed until 1984. That year, the Congress passed and Republican President Ronald Reagan signed into law a package of tax changes known as the 1983 Amendments. They allowed for up to one-half of Social Security benefits to be potentially taxable income.

A decade later, taxes on Social Security benefits were expanded. Democratic President Bill Clinton’s signing of the 1993 Omnibus Budget Reconciliation Act (OBRA) into law added the 85 percent taxability possibility for higher-income beneficiaries.

While the White House was under control of the GOP when the taxation of 50 percent of Social Security benefit law was enacted, and of a Democrat when the second, 85 percent tax was added, one thing is the same in both changes.

The combined income amounts that trigger the taxes has not been increased as the tax years have passed. The earnings levels are not indexed annually for inflation. That means over the years, more Social Security recipients have seen some of their federal benefits taxes.

Which is why changing the tax  on Social Security periodically comes up, like in this year’s presidential campaign.

Political promises and problems: Of course, popular campaign promise aren’t necessarily good governing ideas. And lots of things that candidates say at rallies never makes it into law, even if it helps them win.

And while there’s been some support from both parties for Trump’s no-tax-on-tips proposal, his total tax exemption for Social Security benefits is not as popular, even among some seniors who might benefit.

A major objection is that giving up that tax money would be a fiscal nightmare. Early projections say that the move could cost the U.S. Treasury $1.6 trillion to $1.8 trillion in forgone revenue over a decade. Even if some of the money could be recouped in other taxes or program cuts, the reality is that the federal deficit likely would increase even more.

Opponents also argue that ending the tax would be another giveaway to wealthier taxpayers. And they aren’t the ones who rely heavily on Social Security. Rather, older individuals who never made a lot of money and now depend for the most part on their government payments typically are already exempt from paying tax on their Social Security.

Then there are the political considerations. Next year will be the last for the individual tax provisions of the GOP’s Tax Cuts and Jobs Act (TCJA) of 2017. Throwing a tax-free Social Security proposal into the mix could make coming TCJA negotiations more difficult, especially if there is a divided Congress.

Democrats would want some of the Republican tax cuts traded for any Social Security benefits tax exemption. Their likely target? The current 37 percent top individual income tax rate.

Others might agree to keeping some TCJA provisions in exchange for an end to, or at least a dramatic hike in the, Social Security wage base so that more high earners would pay FICA taxes.

So, while it’s fun (at least for tax geeks and political wonks) to parse the possibilities of such changes, the reality is that making it work is much, much more difficult.

And that means that many senior citizens will need to keep an eye on all their retirement income and be prepared in many cases to pay tax on the Social Security amount they get.

You also might find these items of interest:

• Social Security taxable wage base goes to $168,600 in 2024
• House bill proposes ending federal tax on Social Security benefits
• House bill would increase earnings limit for some working Social Security beneficiaries

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