Social Security Tax Rates
This article is not about the taxes that working people pay on their income
into social security, but rather the social security tax rates that retirees
pay on their social security benefits. Yes, you pay tax on your social security
benefits and that has been the case since 1984 (prior to that, social security
income was tax free).
The tax rates on social security benefits are as follows and based on your
total income. In fact, the table below shows the social security tax rates
based on your modified adjusted gross income (MAGI) which we explain
next.
Percent
of social security income taxed |
Single,
head of household, qualifying widow(er), or married filing separately
and you lived apart from your spouse for all of the year, |
Married
people |
0% |
Less than $25,000 |
Less than $34,000 |
Up to 50% |
$25,001-$34,000 |
$34,001 to $44,000 |
Up to 85% |
More than $34,000 |
More than $44,000 |
Notice that for people with lower income (e.g. single with modified adjusted
gross income below $25,000), social security income is tax free. However, no
amount of social security income is tax free if you are married filing separately
and lived with your spouse at any time during the tax year.
Social Security Tax Rates based on Modified Adjusted Gross Income
MAGI is
One-half of your social security benefits, plus
- All your other income, including tax-exempt interest, plus
- Interest from qualified U.S. savings bonds, plus
- Employer-provided adoption benefits, plus
- Foreign earned income or foreign housing, plus
- Income earned by bona fide residents of American Samoa or Puerto Rico.
If you think about the above list, you see that IRS is determining how rich
you are by considering your interest from tax exempt bonds and US savings
bonds. So your social security tax rate is based on a figure much higher
that your adjusted gross income. By the amount that your MAGI exceeds your
base amount (table above) you pay tax on your social security income at the
social security tax rates specified in the table.
Let's see a sample calculation using the social security tax rates.
George White is single and files
Form 1040 for 2005. In addition to receiving social security payments,
he received a fully taxable pension of $18,600, wages from a part-time
job of $9,400, and taxable interest income of $990, for a total of
$28,990. He received a Form SSA-1099 in January 2006 that shows his
net social security benefits of $5,980.
To figure his taxable benefits, George completes Worksheet 1, shown below.
On line 20a of his Form 1040, George enters his net benefits of $5,980.
On line 20b, he enters his taxable benefits of $2,990.
1. Enter the amount of social security income
received $5,980
2. Enter one-half of line 1 2,990
3. Enter the total MAGI: 28,990
4. Add lines 2 and 3 31,980
5. Subtract the threshold (the amount not taxable) 25,000
6. This is the mount of MAGI income in excess of the threshold 6,980
Since Mr. White's income exceeds the first threshold
of $25,000 for a single person (but does not exceed the second threshold
of $34,000, his bottom line social security tax rate is that he pays
tax on 50% of his social security income. |
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Summary
Knowing how to manage your finances, even your social security decisions,
is a challenge. You can find other related information in our blog Retirement
Income.
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