Taxation of Social Security has been a long debate to date with many opponents arguing that taxing retirees is unfair and amounts to double and sometimes triple taxes. When taxes on this retirement benefit were initially passed, it was targeted at high earners and very few people were taxed due to the high threshold. However, over the years, there have been no adjustments for inflation in the tax ceiling for this benefit. Because of this, there are many more people reaching the tax threshold today. There has been a lot of promotion to adjust the threshold for the taxation of this benefit. However, with the outstanding government deficit currently running (in the multi-trillion dollars range), this may not be the time to expect a change in Social Security taxes. The determination and calculation of Social Security taxation is a complex process.
Tax Process
Social Security taxes depend on total income, including the amount of the distribution and other taxable income. If 50% of the federal retirement benefit plus any other taxable income received is more than $25,000.00 for individuals and $32,000.00 for couples filing jointly, then the taxpayer will pay taxes on the Social Security benefits. Income is taxed up to a maximum of 85% of adjusted gross income. However, the tax process is not as simple as this. There are other tax factors, including exclusions, that make the calculation more complex. One may require the help of a tax preparer to know the exact tax liability in case their income falls within the taxable bracket.
Elements that can affect taxation
There are several elements that can affect Social Security taxation and whether or not one qualifies for taxation. First, qualifying for taxation is not limited to net Social Security distributions received, but even includes attorneys’ fees and any workers’ compensation distributions. These other figures can easily push the profit threshold to the taxable level. Another item that can easily push the figure to the taxable level is gambling winnings. All gambling winnings are added to the retirement benefit as part of adjusted gross income before gambling losses are subtracted. Therefore, even if your gambling caused a loss in a given tax year, the winnings will be considered separately as part of your adjusted gross income; if the amount exceeds the taxable threshold, it will be subject to tax. Another item that can affect Social Security taxation is lump-sum benefits received from the employer after retirement. However, there are several adjustments that are made to the lump sum payment received, especially if these funds include benefits accrued during years of work.
Different states handle profit taxes differently
Social Security taxes also differ from state to state. In fact, there are states where citizens do not pay taxes on these benefits. Some states, like Kansas, will allow citizens to deduct Social Security benefits from their adjusted gross income up to a certain limit to reduce the tax burden on retirees. Therefore, you will need to check your state’s policy to determine if you have a tax liability and, if so, how much.