Taxes on Social Security benefits did not exist before 1984. In order to make sure that the program remains solvent, lawmakers passed a bipartisan bill to tax a portion of some payments received by senior citizens, surviving spouses, and the disabled whose income exceeds certain levels.
A comparatively small number of beneficiaries, about one in ten, paid income taxes at the beginning of their benefits. However, this proportion has increased over time because thresholds are not adjusted for inflation, unlike benefits, and there has been no inflation adjustment over the last four decades. Therefore, as benefits increased, an increasing number of recipients went over the threshold. Currently, 56 percent of recipients pay income taxes on some or all of their benefits, and their income may exceed the upper-income thresholds by up to 85% sometimes.
Social Security payments are taxed regardless of age. Nevertheless, as soon as you reach full retirement age (between 65 and 67 years of age, depending on your birth year), Social Security benefits cannot be withheld if, when added to your other income sources, the combined income exceeds the maximum threshold.
Generally, your Social Security benefits will continue to grow until you reach 70 years old, so you might want to hold off on filing for Social Security if you plan to work beyond the normal retirement age.
What Types of Taxes are Applied to Social Security Payments?
In addition to age, a number of factors determine the rate at which Social Security benefits are taxed. The household income of beneficiaries is the biggest determinant of taxation. Filing status for Social Security is also considered.
Taxes by 50% on Social Security earnings will apply to individuals with a total gross income over $25,000. The combined income of married couples filing jointly will start to be taxed when joint income exceeds $32,000.
Individuals with a gross income exceeding $34,000, or married couples making a minimum of $44,000, are subject to Social Security taxes of up to 85%.
Retirement individuals with little or no household income besides their Social Security benefits are usually the only beneficiaries who may not have to pay taxes on their Social Security benefits.
How is the Rate on Social Security Calculated?
Payments from Social Security are taxed at the same rate as other forms of income. In addition to their salary and Social Security benefits, filers must also disclose all of their other sources of taxable income, which are combined into their adjusted gross income.
At least 50 percent of your Social Security benefits will be deemed taxable income if those totals exceed the threshold. More so, several factors, such as those mentioned above, determine what proportion of your Social Security benefits you will receive.