Are Social Security Retirement Benefits Taxable?
The Social Security Administration and the Internal Revenue Service work together as governmental agencies. Social Security retirement benefits were not taxable for the first 45 years of benefits, but the 1983 reform of Social Security changed that. The 1993 amendments increased the federal income taxation of Social Security benefits for high earners. Some states also tax Social Security retirement benefits.
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History
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The Social Security system became a part of the American dream with the enactment of the basic regulations in 1935. Changes made along the way liberalized benefits. In 1956, women could collect Social Security early retirement at age 62; by 1961, men had the same privilege. In 1983, a need to reduce benefits led to reform of the system. Congress imposed sweeping changes to keep Social Security financially sound. One of the changes was taxation of some Social Security benefits by the IRS.
Significance
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Only some retirees feel the effects of the taxation of Social Security retirement benefits, and some feel it more than others do. The taxing of Social Security benefits is set up in three tiers. The first tier pays no tax on Social Security benefits; the second and third tiers pay on a graduated scale.
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Calculations
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Retirees who made under $25,000 a year see no taxation of Social Security benefits, so Social Security without other income has no federal income taxation. The IRS calculates tax based on combined income, not adjusted gross income. Calculation of combined income uses the adjusted gross income figure from the Form 1040 and adds nontaxable interest and 50 percent of Social Security benefits received for the year. If this figure is over $25,000 for individual filers or $32,000 for joint filers, taxation of Social Security benefits occurs.
Effects
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Federal income taxation of Social Security retirement occurs at the second tier. This tier starts at $25,000 for individuals and $32,000 for joint filers, and up to 50 percent of Social Security retirement income is taxable to the next tier. For single filers, the third tier begins at $34,000 and for joint filers, the tier begins at $44,000. Retirees who made over the third-tier figures pay taxes on up to 85 percent of Social Security benefits. Calculations are based on the combined income figure.
States
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Some states are more retirement-friendly than others are. About a third of state governments in the United States tax Social Security benefits. The western states, southern states, and the Great Lakes region states do not tax Social Security benefits. Most of the states taxing Social Security benefits in 2010 are heartland states like Iowa, Nebraska, Kansas and Illinois, extending west to Colorado, New Mexico and Utah. Northern states of Montana, North Dakota and Minnesota are cold when it comes to taxing Social Security benefits. Kentucky, Virginia, Vermont and Connecticut also tax retirement benefits, according to the Kiplinger website interactive map.
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