Friday, February 3, 2023

Social Security Maximum Taxable Earnings

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Social Security Income Limit 2023

Calculating the maximum Social Security tax you can pay

Note: The Social Security earnings limit changes each year. The most current version of this article uses numbers for 2023.

At one of my first speaking engagements, I heard a great story from one of the attendees. Her experience provides us with one of the best examples Ive ever heard of how much the Social Security income limit can catch you by surprise.

A few years earlier, shed been at her bridge club when the topic turned to Social Security. As she and the other card players chatted about the best way to leverage Social Security Benefits, the consensus around the table seemed to be that filing at 62 was the smartest thing to do.

This lady, trusting the advice of some of her closest friends, did just that: She filed for benefits as soon as she turned 62.

She then told me shed always wanted to buy a brand-new Toyota Camry. She figured that, once she started receiving Social Security income, it would be the perfect time to buy the car. She was still working, which meant her Social Security check would be extra income.

As she told the story to me, she bought the car and took out a car loan to do it. She planned to repay the loan using some of the income she expected to receive from her Social Security benefits since she filed for them.

Imagine her surprise, then, when a nasty letter from Social Security Administration showed up in her mailbox. The letter claimed she had been paid benefits that she was not eligible for!

Retirement Earnings Test Exempt Amounts

Workers who receive benefits before they reach full retirement age are subject to the retirement earnings test. If your income exceeds certain thresholds, then Social Security will withhold benefits until you reach FRA. Like the Social Security tax limit, these thresholds typically increase annually with the national wage index.

There are two annual earnings test exempt amounts. The first applies to individuals younger than retirement age and the other applies to individuals who reach FRA during that year. For younger recipients, Social Security withholds $1 for every $2 in excess of their exempt amount. Individuals who reach retirement age will have $1 withheld for every $3 in excess of their exempt amount.

In 2023, the earnings test exemption amounts will increase to:

  • $21,240 for individuals younger than the FRA
  • $56,520 for those who reach their FRA

In other words, an individual who earns $21,240 or less in 2023 may be eligible to receive full Social Security benefits. This is up from $19,560 in 2022.

How Raising The Wage Base Could Work

Once a worker crosses the threshold of paying Social Security taxes on the first $147,000 of their annual earnings, their paychecks are no longer subject to those levies.

As a result, workers who are above the earnings threshold may pay Social Security payroll taxes for part of the year only.

“A lot of people don’t even know there is a maximum, and when they find out, they think the law should be changed so that everybody pays in all year,” Altman said.

A Medicare tax of 1.45% also applies to wages. Combined with Social Security, this represents a 7.65% tax paid both by employees and employers and is known as FICA, which stands for the Federal Insurance Contributions Act.

Notably, there is no wage limit for the Medicare tax, after Congress did away with it starting in 1994.

Today, lawmakers could choose to make the same change to Social Security. They could also choose to increase the tax rate from 6.2%.

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The No Max And Max 90 Options Would Change The Current

The no max and no max plus benefits options completely remove the upper limit on the wage base that is subject to the payroll tax starting in 2008. The max 90 and max 90 plus benefits options gradually increase the tax max beginning in 2008 so that by 2017, 90 percent of all OASDI-covered earnings would be subject to the payroll tax. From 2018 onward, the annual tax max would equal the previous year’s tax max multiplied by 1 plus the percentage growth in the average wage index. Chart 1 shows the tax max under current law and the max 90 and max 90 plus benefits options .13 The gap between the current-law tax max and the proposed max 90 and max 90 plus benefits options reaches $155,412 by 2017.

max 90Max 90max 90 plus benefits

Change To Earnings Test Exempt Amounts

Maximum Social Security Taxes: 4X Increase Since 1970

Social Security withholds benefits if your earnings exceed a certain level and if you are under the full retirement age . This is called the retirement earnings test exempt amount. According to the SSA, one of two different exempt amounts apply a lower amount in years before the year you reach FRA and a higher amount in the year you reach FRA.

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If you are under full retirement age, the earnings test exempt amount rises to $1,770 a month in 2023 from $1,630 a month in 2022. If you have reached FRA, the amount rises to $4,710 a month in 2023 from $4,330 in 2022.

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Other Key Social Security Increases In 2022

Along with the wage base, the retirement earnings test exempt amount rises every year. The exempt amount applies to people who are receiving benefits but have not reached full retirement age . If you earn more than this amount, the Social Security Administration will withhold $1 in benefits for every $2 you earn above the limit. The amount is higher the year you reach FRA, and the SSA will withhold $1 in benefits for every $3 you earn above the limit.

For workers who have yet to reach their FRA, the 2022 earning limit is $19,560, up from the 2021 earning limit of $18,960. If 2022 is the year you will reach your FRA, the limit is $51,960, up from $50,520 in 2021.

Another number that generally increases every year is the benefit amount, which gets a cost-of-living adjustment . For 2022, the COLA jumped 5.9%, the highest in decades. However in 2023 the COLA climbs 8.7%.

Removing Thetaxable Wage Cap Would Harm The Economy

Removing the Social Security taxable wagecap would reduce job creation and economic growth whilesubstantially increasing payroll taxes on American workers. Aslowdown in the growth of compensation and a significant decreasein the savings rate would further squeeze family budgets.

Toanalyze the economic effects that removing the taxable wage capwould have on jobs and economic growth, Heritage analysts used theAugust 1998 U.S. Macro Model of the WEFA Group.26 WEFA economists reconstructedtheir August model for The Heritage Foundation to embody theeconomic and budgetary assumptions published by the CongressionalBudget Office last August. Thus, it is fair to say thatsimulations of policy changes using this specifically adapted modelproduce dynamic results based on CBO assumptions.

TheHeritage analysis using the WEFA model indicates that removing thetaxable wage cap would harm families and decrease job opportunitiesover the five-year period between fiscal years 2000 and 2004. Specifically, the Heritage analysis suggests thatremoving the taxable wage cap would:

Eliminating the Social Security tax capwould increase the CBO’s forecast of a $594 billion surplus overthe FY 2000 to FY 2004 period to $941.9 billion. Most of thisincrease is reflected in the off-budget surplus,but the CBO’s $100 billion on-budget deficit forecast from FY 2000to FY 2004 would be cut in half, to a deficit of $50.1 billion, asinterest payments on the national debt declined.

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How To File Social Security Income On Your Federal Taxes

Once you calculate the amount of your taxable Social Security income, you will need to enter that amount on your income tax form. Luckily, this part is easy. First, find the total amount of your benefits. This will be in box 3 of your Form SSA-1099. Then, on Form 1040, you will write the total amount of your Social Security benefits on line 5a and the taxable amount on line 5b.

Note that if you are filing or amending a tax return for the 2017 tax year or earlier, you will need to file with either Form 1040-A or 1040. The 2017 1040-EZ did not allow you to report Social Security income.

Additional Medicare Tax Withholding Rate

9% Increase – Social Security Maximum Taxable Earnings in 2023

Additional Medicare Tax applies to an individual’s Medicare wages that exceed a threshold amount based on the taxpayer’s filing status. Employers are responsible for withholding the 0.9% Additional Medicare Tax on an individual’s wages paid in excess of $200,000 in a calendar year, without regard to filing status. An employer is required to begin withholding Additional Medicare Tax in the pay period in which it pays wages in excess of $200,000 to an employee and continue to withhold it each pay period until the end of the calendar year. There’s no employer match for Additional Medicare Tax. For more information, see the Instructions for Form 8959 and Questions and Answers for the Additional Medicare Tax.

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Social Security Earnings Limits Increase For Work Income

Social Security recipients who also earn other income might have their payments reduced, depending on the amount of outside earnings. For those who have not reached full retirement age, the yearly threshold rises to $21,240 in 2023 from $19,560 in 2022. For every $2 in work income above that limit, the SSA withholds $1 in benefits.

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If you reach FRA in 2023, the SSA will withhold $1 in benefits for every $3 in earnings above $56,520 until the month you reach full retirement age. That threshold is up from $51,960 in 2022. After you reach FRA, none of your benefits are reduced regardless of how much you earn.

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Value Of The Tax Max Relative To The Larger Economy

Policymakers have used three common measures of tax max earnings values: nominal dollars, inflation-adjusted dollars, and wage-adjusted dollars. Chart 1 shows 19372009 tax max values for these three measures. The tax max values described above and shown in Table 1in which the tax max was virtually static in the early years of the program and has grown steadily since the 1970sare expressed in nominal dollars. The tax max did not increase between 2009 and 2011, as there was no cost-of-living adjustment for recipients.7

However, the nominal values do not account for inflation. Inflating the nominal tax max values between 1937 and 20098 to 2009 dollars using the Consumer Price Index for Urban Wage Earners and Clerical Workers shows that the real value of the tax max fell in the early years of the program, before climbing intermittently during the late 1950s and 1960s to again attain approximately the real value seen in the program’s first several years. Indexing the tax max to wage growth from 1975 onward has caused its real value to grow since then, as wages have generally increased more quickly than inflation.

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Social Security Tax Limit 2023

For money earned in 2023, the taxable maximum is $160,200, which is nearly a nine percent increase from 2022.

People who make more than $160,200 in 2023 will be paying $818 more in Social Security taxes.

Some individuals will be exempted from paying taxes if they are ministers and church employees or members of certain religious groups who waive their rights to all Social Security benefits.

Students who are employed by their school like international students who are temporarily in the U.S. under certain types of visas are also exempted.

Minors employed in a family business and non-citizens working for a foreign government in the US, and self-employed individuals with less than $400 of income aren’t required to pay Social Security taxes.

The Evolution Of Social Security’s Taxable Maximum

81 Years of Social Security

Population Fact Sheet: Taxable Maximum Earners

Since its inception, Social Security has featured a taxable maximum . In 1937, payroll taxes applied to the first $3,000 in earnings. In 2011, payroll taxes apply to the first $106,800 in earnings. This policy brief summarizes the changes that have occurred to the tax max and to earnings patterns over this period. From 1937 to 1975, Congress increased the tax max on an ad-hoc basis. Increases were justified by the desire to improve system financing and maintain meaningful benefits for middle and higher earners. Since 1975, the tax max has generally increased at the same rate as average wages each year. Some policymakers propose increasing the tax max beyond wage-indexed levels to help restore financial balance and to reflect growing earnings inequality, as workers earning more than the tax max have experienced higher earnings growth rates than other workers in recent decades.

Kevin Whitman and Dave Shoffner are with SSA’s Office of Retirement and Disability Policy, Office of Retirement Policy. Questions about the analysis should be directed to the authors at 358-6317 and 358-6210, respectively.

Acknowledgments: The authors thank Andrew Biggs, Larry DeWitt, Mark Sarney, and David Weaver for their helpful comments and suggestions.

The findings and conclusions presented in this brief are those of the authors and do not necessarily represent the views of the Social Security Administration.

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How The Social Security Tax Works

According to the Social Security Administration , an average of 66 million people per month received Social Security benefits on average of $1,681 per month in 2022. Benefit recipients will begin receiving a slightly larger amount of $1,827 due to the cost-of-living adjustment. These payments are funded by the Social Security tax, which is also known as the Old Age, Survivors, and Disability Insurance .

The tax has two parts:

Payroll taxes are based on an employees gross wages, salaries, and tips. These taxes are typically withheld by an employer and forwarded to the government on the employees behalf. In 2023, the Social Security tax rate is 6.2% for the employer and 6.2% for the employee.

Medicare taxes are split between the employer and the employee, with a total tax rate of 2.9% for the 2022 and 2023 tax years.

What Is The Social Security Tax Limit

You arent required to pay the Social Security tax on any income beyond the Social Security wage base limit. In 2022, this limit is $147,000, up from the 2021 limit of $142,800. As a result, in 2022 youll pay no more than $$9,114 in Social Security taxes.

Keep in mind that this income limit applies only to the Social Security or Old-Age, Survivors and Disability Insurance tax of 6.2%. The other payroll tax is a Medicare tax of 1.45%, and youll have to pay that for all income you earn. In fact, for income over $200,000 , the Medicare tax rate rises to 2.35%.

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Reasons To Eliminate The Income Cap For Social Security Taxes

In the first few days of 2023, at least 500 US workers will likely have already paid their Social Security taxes for the year.

Thats because in just a day they earn the maximum amount of income subject to Social Security tax, or $160,200. Those are just executives at public companies where salaries are disclosed, such as Apple Inc. CEO Tim Cook, who earned $98 million in 2021, and Intel Corp. CEO Patrick Gelsinger, who took home more than $177 million. Scores more executives at private companies fall into the same category.

Heres how the system works. To help pay for Social Security, a tax of 12.4% is split between employees and employers a worker is subject to a 6.2% tax assessed on earnings up to a certain amount $160,200 in 2023. Over the past four decades, Social Securitys taxable wage base has shrunk because workers are paid more in non-taxed benefits, such as health insurance. In addition, people earning high wages have received bigger raises than the bottom 95% of earners.

No surprise, Social Security will only be able to pay 76% of promised benefits by 2033 if nothing changes. The payroll tax would have to increase by 3.47 percentage points from the current 12.4% to be able to guarantee promised benefits for the next 75 years.

About 180 million Americans contributed a total of $943 billion to Social Security in 2021. Ending the cap for the 5% of US workers who earn more than $160,200 would increase revenue by more than $150 billion.

Irs Reminds Taxpayers Their Social Security Benefits May Be Taxable

Social Security Taxes Set to Rise for High-Income Americans

IRS Tax Tip 2022-22, February 9, 2022

A new tax season has arrived. The IRS reminds taxpayers receiving Social Security benefits that they may have to pay federal income tax on a portion of those benefits.

Social Security benefits include monthly retirement, survivor and disability benefits. They don’t include supplemental security income payments, which aren’t taxable.

The portion of benefits that are taxable depends on the taxpayer’s income and filing status.

To determine if their benefits are taxable, taxpayers should take half of the Social Security money they collected during the year and add it to their other income. Other income includes pensions, wages, interest, dividends and capital gains.

  • If they are single and that total comes to more than $25,000, then part of their Social Security benefits may be taxable.
  • If they are married filing jointly, they should take half of their Social Security, plus half of their spouse’s Social Security, and add that to all their combined income. If that total is more than $32,000, then part of their Social Security may be taxable.

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