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Your Social Security check might be taxed. How that could change


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According to the old saying, death and taxes are both certainties of life.

However, many individuals may not be aware that Social Security benefits are subject to taxes.

Unique is the way these levies were applied.

Recent MassMutual Quiz found that only 42% of the 1,500 participants near retirement could correctly determine whether this statement was true or false. “Social Security retirement benefits can be subject to income taxes just as traditional withdrawals. [individual retirement] account.”

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Social security benefits are different from IRA withdrawals in that they do not fall under the tax rules.

You can declare any income from your IRA without a cap. Social Security benefits are subject to a maximum income limit.

Nancy Altman (president of Social Security Works), a social welfare agency, stated that taxes on benefits are not understood.

What Social Security Taxes are.

Altman stated that the fact that benefits are subject to levies is not popular. She said, “People don’t like it but it is actually a policy decision.”

It is a good policy because Social Security benefits as well as private pensions, are both taxed the same way.

Benefits were not subject to tax when the program was established in 1935. In 1983 Congress made changes to the rules that allowed up to half of Social Security benefits to become taxable income. This was possible if one’s income exceeded certain thresholds.

1993 saw more changes, with a 5% increase in the taxation of some Social Security benefits. The change also applied to those with higher income beneficiaries.

It was a difficult set of rules which is still applicable today.

First, taxes are calculated on the basis of what is called provisional or combined earnings. It includes the half-time of your Social Security Benefits plus your adjusted gross and nontaxable income. This means any income from wages or interest as well dividends and other taxable income are counted.

The 50%-85% thresholds will then be applied.

A couple with an income of $25,000 to $34,000 combined will have income tax for up to 50% on their benefits. For couples earning between $32,000 to $44,000, the same applies.

Tax may be imposed on individuals and couples earning more than $34,000 combined, or up to 85% for their benefits.

When it was passed, it was intended that the law would not affect those with high incomes.

Joe Elasser

Covisum’s founder and president

These thresholds do not have an index, meaning they were not updated after they were established in Congress’s first session.

As such, taxation on benefits has become more common.

Joe Elsasser (founder and President of Covisum), a software provider for Social Security claims, stated that while it had been intended to only impact high-income earners at the time it was passed in 1983 it has since impacted more people from the middle classes.

He said that benefits are generally not taxed if your income falls below these thresholds. For higher-wage earners, however, the levies look more like a benefit reduction.

Taxes generate direct revenue that goes into the Social Security trust fund.

What taxes may be applicable to benefits?

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Social Security’s trust fund are in serious decline. Last year, the Federal Agency projected that they would run out in 2034. At which point 78% will be paid.

The program can be bolstered by lawmakers in a variety of ways. They may. raise the retirement age. These may be also raise payroll taxes.

Jason Fichtner chief economist, Bipartisan Policy Centre, said that when they finally consider tax changes, they will likely reevaluate how benefits are taxed.

Fichtner states that taxation on benefits can be viewed as a backdoor means test. It reduces benefits to people with a particular wealth level or asset.

He suggested that Congress might adjust income levels and percentages to higher-income people while also making sure those with lower benefits do not suffer the same changes.

Elsasser suggests that these key changes can be made in one of the following ways:

Congress might replace the two current thresholds with one that is higher, 85 cents per dollar or the whole of the dollar.

They could also choose to remove the provisional income calculation, and include all income towards the thresholds.

These kinds of adjustments are more appealing to politicians on both sides of an aisle than any other option.

Fichtner explained that “Saying you’re going to decrease your benefit is not politically appealing.” Republicans are more likely to agree to this if they say we will tax wealthy individuals on their benefits.