Home Career Your Social Security check may be taxable. How that can change

Your Social Security check may be taxable. How that can change

22
0

Fertnig | E + | Getty Images

As they say, death and taxes are two beliefs in life.

But many people may not realize that their social security payments they receive from the government are also taxed.

The way these fees are applied is unique.

A recent MassMutual quiz found that only 42% of 1,500 retired respondents were able to correctly determine whether or not the following statement was true: “Social security pension benefits are subject to income tax, as are traditional benefits. [individual retirement] account “.

More from Personal Finance:
The retirement age for social insurance can vary up to 67 years
Inflation indicates a greater adjustment in the cost of living of social insurance
Wages up to $ 147,000 taxable for social security may change

The answer is false.

In fact, social security payments and IRA withdrawals are not treated equally under tax rules.

There is no limit to the income you must report from the IRA. But there is a limit to the payment of social security benefits.

“It’s not very clear,” said Nancy Altman, president of Social Security Works, about tax benefits.

How social security taxes work

The fact that fees apply to aid is “extremely unpopular,” Altman said. “People hate it, but it really makes political sense,” she said.

One of the main reasons for good policy is that social security payments and private pensions are taxed in a similar way.

When the program was established in 1935, benefits were not taxed. This began to change in 1983, when Congress changed the rules so that up to 50% of social security payments could be included in taxable income if the taxpayer’s income exceeded certain thresholds.

More changes took place in 1993, as a result of which the share of some social security payments subject to taxation rose to 85%. This change concerned higher incomes.

The result is a complex set of rules that still applies today.

First, taxes are based on what is known as temporary or combined income. This includes half of your Social Security benefits plus your adjusted gross income and non-taxable interest. This means that any income from wages, interest, dividends or other taxable income is calculated.

Thresholds of 50% and 85% are then applied.

Individuals with a combined income of $ 25,000 to $ 34,000 will pay income tax on up to 50% of their benefits. This also applies to couples with incomes ranging from $ 32,000 to $ 44,000.

Individuals with a total income of more than $ 34,000, as well as couples with more than $ 44,000, can pay tax on up to 85% of their benefits.

It was intended that it would only affect high-income people when it was first adopted in 1983.

Joe Elaser

founder and president of Covisum

These thresholds are not indexed, which means they have not been updated since Congress established them.

Thus, over time, more and more people began to be taxed on their benefits.

“It was intended to affect only those earning high incomes when it was first adopted in 1983, but over time it sank further and further into the middle class,” said Joe Elsaser, founder and president of Covisum. social security software.

If your income is below the thresholds, your benefits are usually not taxable, he said. But for those earning higher wages, the fees are more like a reduction in benefits.

Tax revenues are directed directly to social security trust funds.

How taxes on benefits can change

zimmytws | iStock | Getty Images

Social security trust funds are running out. Last year, the federal agency predicted they could be depleted in 2034, and at that point 78% of benefits would be paid.

Lawmakers have several options for backing up the program. They can raise the retirement age. They can too raise payroll taxes.

According to Jason Fichtner, chief economist at the Center for Bipartisan Policy, if they eventually consider the changes, a reassessment of how taxes are taxed will also be on the table.

According to Fichtner, taxation of benefits is a kind of testing of funds on the back door, which leads to reduced benefits for people with a certain level of wealth or assets.

Congress can adjust income levels or interest rates for people with higher incomes, and make sure the changes don’t affect those with lower benefits, he suggested.

According to Elsaser, there are several basic ways to implement these changes.

Congress could replace the current two thresholds with a higher one, which is taxed at 85 cents on the dollar or the entire dollar.

In addition, they could exclude a temporary income calculation and calculate all income to thresholds.

Such adjustments may be more pleasing to political leaders on both sides of the aisle compared to other options.

“To say I’m going to reduce your profits is not for sale politically,” Fichtner said. “But saying we’re going to tax more affluent people on their benefits, it’s probably more politically possible for Republicans.”

Source link

Previous articleDelete this personal information that Google knows about you
Next articleMississippi Stories: Brigadier General Maxi J. Phillips