Taxation on Social Security has been a long debate to date with many opponents arguing that taxing retirees is unfair and amounts to double and at times, triple taxation. When taxation on this retirement benefit was initially passed, it targeted high-income earners and very few people ever got taxed due to the high threshold. However, over the years, there have been no inflation adjustments to the cap on taxation of this benefit. Because of this, there are much more people who are getting to the taxation threshold today. There has been quite some advocacy to adjust the threshold for the taxation of this benefit. However, with the outstanding government deficit that currently stands (at several trillion dollars), this may not be the time to expect a change on taxation of Social Security. The determining and calculation of Social Security taxation is a complex process.
Social Security taxation depends on ones total income, including the distribution amount and other taxable incomes. If 50% of one’s federal retirement benefit plus any other taxable incomes received totals to more than $25,000.00 for individuals and $32,000.00 for couples that file jointly, then the taxpayer will be taxed on the Social Security benefits. The income is taxed to a maximum of 85% of one’s Gross Adjusted Income. However, the taxation process is not as straightforward as this. There are other tax factors, including exclusions, which make the calculation more complex. One may require the help of a tax preparer to know the exact tax obligation in case his or her income falls within the taxable bracket.
Items That Can Affect Taxation
There are various items that can affect the taxation on Social Security and whether or not one qualifies for taxation. Firstly, the qualification for taxation is not limited to the net Social Security distributions received but rather, includes even the attorney’s fees and any distributions for Workers Compensation. These other figures can easily push the threshold of the benefit to the taxable level. Another item that can easily push the figure to the taxable level is wins from gambling. Any earnings from gambling are added to the retirement benefit as part of the Gross Adjusted Income before subtracting the losses from gambling. Therefore, even if your gambling hobby yielded a loss in a given tax year, the wins will be considered separately as part of your Adjusted Gross Income; if the amount goes to beyond the taxable threshold, you will be subject to taxation. Another item that may affect the taxation of Social Security is any lump sum benefits received from one’s employer after retirement. However, there are various adjustments that are done to the lump sum payment received, especially if these funds include benefits accumulated over the working years.
Different States Handle Taxation on the Benefit Differently
Taxation on Social Security also differs from state to state. In fact, there are states where citizens are not taxed for this benefits. Some states, such as Kansas, will allow the citizens to deduct Social Security benefits from their Adjusted Gross Incomes up to a given cap to reduce the tax burden on retired taxpayers. You will therefore, need to check your state policy to determine whether you have a tax obligation and if so, how much.