Social Security Taxable Income Limit 2022

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Who Is Exempt From Paying Social Security Tax

Certain individuals may claim an exemption and not be required to pay Social Security taxes. Some religious groups that openly oppose Social Security benefits may claim a religious exemption. Non-resident aliens may be exempt depending on their type of visa. Students working at their university may be exempt. Lastly, workers for a foreign government may be exempt under certain circumstances. If you believe you may fall into one of these groups, consult your tax advisor.

Will You Owe Taxes On Your Social Security Benefits

As with most questions about taxes, the answer is “it depends.”

About 40% of people who get benefits pay income taxes on them, according to the Social Security Administration . That’s because their income in retirement exceeds limits set by tax rules and regulations.

Generally, if Social Security is your only retirement income, you won’t have to pay taxes on it. But if you have at least moderate income, you’ll most likely owe the government some money.

The good news is that while up to 85% of your benefits may be taxed at ordinary income rates, it’s never 100%. That’s considered tax-efficient compared with other retirement plans whose distributions may be fully taxable. In addition to the federal tax bite, 13 states also tax Social Security benefits using either the federal provisional income formula or their own.

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Dont Expect To Receive Social Security Benefits

Treat Social Security as an expense to help support older generations who paved the way for your success. If you end up receiving Social Security benefits, then wonderful. It will truly feel like bonus money.

If you dont end up receiving Social Security benefits, then all the same. You helped your elders and never expected to receive any benefits in the first place.

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For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. Everything is written based off firsthand experience. The maximum income for Social Security tax is a FS original post.

History And Rationale For Taxing Social Security Benefits

For more than four decades, Social Security benefits were not subject to income tax. The Treasury Departments rationale for not taxing Social Security benefits was that the benefits under the Act could be considered as gratuities, and since gifts or gratuities were not generally taxable, Social Security benefits were not taxable.

Former Social Security Commissioner Robert M. Ball long argued that, since Social Security is an earned benefit, it should be taxed like other earned benefits, such as employer pensions. Workers pay income tax on private pensions to the full extent that their benefits exceed their contributions, with no income thresholds.

As a leading member of the Greenspan commission on Social Security in 1982-83, Ball had an opportunity to promote this idea. The subsequent Social Security Amendments of 1983 provided that up to 50 percent of benefits would be taxable for beneficiaries with incomes above certain levels. A decade later, the Omnibus Budget Reconciliation Act of 1993 provided for the taxation of up to 85 percent of benefits for individuals with modified AGI above somewhat higher thresholds. The provision has since remained unchanged.

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Social Security Income Limit 2023

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!

How To Calculate Your Social Security Income Taxes

If your Social Security income is taxable, the amount you pay will depend on your total combined retirement income. However, you will never pay taxes on more than 85% of your Social Security income.

Again, if you file as an individual with a total income thats less than $25,000, you wont have to pay taxes on your Social Security benefits in 2022. For the 2022 tax year , single filers with a combined income of $25,000 to $34,000 must pay income taxes on up to 50% of their Social Security benefits. If your combined income is more than $34,000, you will pay taxes on up to 85% of your Social Security benefits.

For married couples filing jointly, you will pay taxes on up to 50% of your Social Security income if you have a combined income of $32,000 to $44,000. If you have a combined income of more than $44,000, you can expect to pay taxes on up to 85% of your Social Security benefits.

If 50% of your benefits are subject to tax, the exact amount you include in your taxable income will be the lesser of either:

• half of your annual Social Security benefits OR
• half of the difference between your combined income and the IRS base amount

The example above is for someone whos paying taxes on 50% of their Social Security benefits. Things get more complex if youre paying taxes on 85% of your benefits. However, the IRS helps taxpayers by offering software and a worksheet to calculate Social Security tax liability.

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Where To Go For Tax Help

It is incredibly important that your taxes are filed accurately and on time. If you are struggling with your taxes, it is recommended that you work with a certified tax preparer or a CPA. You can also receive free tax help from the IRS online or over the phone. They can help you get the correct forms, order instructional materials, and determine whether you need to file. In some cases, you may even be able to receive free in-person assistance with your returns through Volunteer Income Tax Assistance and Tax Counseling for the Elderly .

The IRS also has many free online resources to help answer your tax questions, including:

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Effects On The Budget

According to the staff of the Joint Committee on Taxation , implementing the first alternative would raise the maximum taxable amount to $300,000 in calendar year 2023 and increase revenues by an estimated $692 billion from 2023 through 2032. Because Social Security benefits are tied to the amount of earnings on which taxes are paid, however, some of that increase in revenues would be offset by additional benefits paid to people with earnings above the maximum taxable amount under current law. On net, this alternative would reduce federal budget deficits by an estimated $670 billion over the 10-year period. If the maximum taxable amount was adjusted by a different amount, the change in revenues would not necessarily be proportional because earnings are not evenly distributed.

Implementing the second alternative would decrease the deficit by $1.2 trillion from 2023 through 2032, according to JCT.

Although the estimates presented here reflect the assumption that total compensation would remain unchanged, they allow for behavioral responses to the higher tax. If total compensation remained unchanged, then increases in employers’ contributions to payroll taxes would have to reduce other forms of compensation. The decrease in taxable wages and benefits would reduce the income base for individual income and payroll taxes, partially offsetting the increase in employers’ payroll taxes. The estimates for the option reflect that income and payroll tax offset.

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Calculating Fica Taxes: An Example

An employee who makes $165,240 a year collects semi-monthly paychecks of $6,885 before taxes and any retirement-plan withholding. Though Medicare tax is due on the entire salary, only the first $147,000 is subject to the Social Security tax for 2022. Since $147,000 divided by $6,885 is 21.3, this threshold is reached after the 22nd paycheck.

For the first 21 pay periods, therefore, the total FICA tax withholding is equal to + , or $526.70. Only the Medicare HI tax is applicable to the remaining three pay periods, so the withholding is reduced to $6,885 x 1.45%, or $99.83. In total, the employee pays $8,964.27 to Social Security and $2,395.98 to Medicare each year. Though it does not affect the employee’s take-home pay, the employer must contribute the same amount to both programs.

As mentioned above, those who are self-employed are considered both the employer and the employee for tax purposes, meaning they are liable for both contributions. In the example above, a self-employed person with the same salary pays $17,928.54 to Social Security and $4,791.96 to Medicare.

How The Cola Is Calculated:

The Social Security cost of living adjustment is based on the difference between how much the Consumer Price Index for Urban Wage Earners and Clerical Workers from the third quarter of the last cost of living increase to the third quarter of the current year. If there is no increase, there will be no cost of living increase.

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Is It Better To Withhold Taxes

Remember, one of the big reasons you file a tax return is to calculate the income tax on all of your taxable income for the year and see how much of that tax youve already paid via withholding tax. If it turns out youve overpaid, youll probably get a tax refund. If it turns out youve underpaid, youll have a tax bill to pay.

If you ended up with a huge tax bill this year and dont want another, you can use Form W-4 to increase your tax withholding. Thatll help you owe less next year.

If you got a huge tax refund, consider using Form W-4 to reduce your tax withholding. Youre giving the government a free loan and even worse you might be needlessly living on less of your paycheck all year. It may feel great to get a tax refund from the IRS, but think of how life mightve been last year if youd had that extra money when you needed it for groceries, overdue bills, getting the car fixed, paying off a credit card or investing.

Continuing To Work Past Your Fra Could Increase Your Benefitsdepending

So will your monthly benefit go up if you continue to have earned income? That might be the case if your current salary is higher than one of your 35 highest-earning years to date. Here are a couple of examples.

First, let’s say that you earned the maximum taxable income each of those 35 years. If so, you’re already entitled to the maximum benefit. So while there may be a lot of other positive reasons for continuing to work, it won’t get you a higher monthly Social Security payment.

But now let’s say you earned less in the early part of your career and earnings in one or more of those years were lower than the maximum annual taxable income. If what you’re earning now is higher than what you earned in one of your past 35 highest-earning years that have been indexed for wage inflation, your current higher income will replace one of the lower-earning years.

Since Social Security benefits are recalculated yearly, this added income could result in a higher monthly payment. But because there are 35 years of income included in the calculation to determine income over your remaining life expectancy from Social Security, you may not see much of a difference in your monthly payment. Fortunately, Social Security payments are adjusted for inflation, so every little increase can add up over time.

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Control Your Capital Gains And Harvest Your Losses

During bull markets, the capital gains that retirees can generate when they sell investments to cover living expenses can be a big contributor to getting more of their Social Security taxed. For every $1,000 in additional capital gains you have, you could potentially add $500 to $850 to the amount of your Social Security benefits that youll have to include as taxable income.

If you can avoid those gains or defer them to another year, it could help you avoid paying more taxes on your benefits. Moreover, if you can harvest capital losses on losing investments, it could help offset not only gains on other investments but also up to $3,000 of other types of income each year. That could end up saving you hundreds of dollars in taxes.

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Income Earned During The Year You Reach Fra

During the year you reach FRA, and up to that month you reach FRA, Social Security will deduct $1 for every $3 you earn that is over the annual earnings limit. For the year in which you will reach FRA, the earnings limit is different.

In 2021, this earnings limit is $50,520 , which means that you can earn up to $50,520 before having any pay deducted. The limit is $51,960 for those reaching FRA in 2022. During the year in which you reach FRA, Social Security only counts earnings that you receive before the month you reach FRA.

For example, lets assume you were born in 1955, which means your FRA is age 66. You turned 66 in June 2021 and began your Social Security benefits at that time. You earned $44,000 from January through May of 2021. Your benefits will not be reduced, because you earned less than $50,520 during the months before you attained full retirement age.

The Social Security Administration website provides additional examples of how this deduction works. You can also use the earnings test calculator and plug in your date of birth and expected earnings to see whether you think a reduction will apply to you.

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Income Tax Calculator: Estimate Your Taxes

If you wait until January 2023 to start drawing your benefits, then a smaller reduction percentage will be applied to your benefit rate, but that wouldnt amount to as much as an 8% increase. 8% is the annual increase caused by delayed retirement credits , which can only be earned between a persons full retirement age and 70. The actual difference between your age 62 and age 63 amounts would be less than 8%.

You may want to consider using my companys software Maximize My Social Security or MaxiFi Planner to ensure your household receives the highest lifetime benefits. Social Security calculators provided by other companies or non-profits may provide proper suggestions if they were built with extreme care. Best, Larry

Is My Mom Eligible To A Widows Benefit?

Hi Larry, My dad died in 2015 and he was not on Social Security. He would be 60 this September. Would my mom be eligible to receive a widows benefit based on my deceased fathers Social Security record? Thanks, Henry

If she meets these requirements, she can be eligible for widows benefits. If she applies and SSA finds that shes not eligible for some reason, theres no penalty for applying. Best, Larry

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Income Limit For Maximum Social Security Tax 2022

Updated: by Financial Samurai

Social Security is Americas national pension system. The income limit for maximum social security tax goes up every year, because Social Security is underfunded by roughly 25% as of 2022.

For those of you who believe the government is efficient and benevolent, the good news is that the income limit for maximum Social Security tax rises to $147,000 for 2022, up from $142,800 in 2021, and $137,700 in 2020. Curiously, that equates to only a 2.94% increase versus the 5.9% COLA increase for 2022.

Raising the income limit for Social Security tax brings in more funds, thereby increasing the viability of our national pension system.

After you make over $147,000 in 2022, every dollar no longer faces the 6.2% Social Security tax rate. But it still faces the Medicare tax for an unlimited amount of income. Therefore, higher income earners do catch a FICA tax break where they see their after-tax income go up.

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