Did You Know?
The Social Security benefit calculation uses your average Indexed Monthly Earnings. Moreover, it does so for 35 of your highest earning years. For clarification, Indexed Monthly Earnings are your actual monthly earnings adjusted to account for changes in average wages over time.
You can receive estimates of your future Social Security benefit. Just create and login to your free "my Social Security" account. The estimates are based on your earnings to date. Furthermore, you can use the online benefits calculator to determine alternate estimates. You can try various retirement scenarios. Certainly, the calculator can be very valuable in planning for your retirement.
Need to Know!
Some state governments tax Social Security benefits. This is the case if you live in the following states: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont or West Virginia.
Furthermore, what few people are aware of, the federal government also taxes Social Security benefits. During 1983, when Social Security was facing exhaustion of reserve funds, the federal government made a change to implement taxation of Social Security benefits. Additionally, in 1993, the federal government made another change. This change implemented a second tier of taxation.
Accordingly, today we have a two-tier Social Security benefit taxation system. Even worse, the system uses income tier values that have never been updated to account for inflation. Your Combined Income determines the percentage of the Social Security benefit that is taxable. To clarify, your Combined Income is the total of your Adjusted Gross Income (AGI), plus any nontaxable interest (such as from municipal bonds), plus one-half of your Social Security benefit.
As a result, individuals with a Combined Income of $25,000 to $34,000 ($32,000 to $44,000 for married couples) will pay federal taxes on up to 50% of their Social Security benefit. Whereas, individuals with a Combined Income above $34,000 ($44,000 for married couples) will pay federal taxes on up to 85% of their Social Security benefit.
Need to Know More?
For 50% Social Security benefit tax payers (Tier 1), the exact amount of the Social Security benefit that is taxable is the lesser of 50% of the Social Security benefit, or 50% of the difference between the Combined Income and the income base. The Tier 1 income base is $25,000 for individuals and $32,000 for married couples.
Correspondingly, for 85% Social Security benefit tax payers (Tier 2), the exact amount of the Social Security benefit that is taxable is the lesser of 85% of the Social Security benefit, or 85% of the difference between the Combined Income and the income base. The Tier 2 income base is $34,000 for individuals and $44,000 for married couples.
The IRS has created Publication 915 to help figure your Taxable Social Security.
The Social Security Administration (SSA) is an independent agency of the U.S. federal government that administers Social Security. In addition to retirement benefits, the SSA also handles disability and survivor benefits. The SSA Website contains a vast amount of useful Social Security information. Also, the SSA Social Security benefits publication (downloadable below in PDF format) provides a great summary reference.
Know How to Get Ready... Get SET!
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