Laws on Income Tax on Social Security Income
The establishment of Social Security revolved around the desire to provide economic protection to seniors who had labored in paying positions and could no longer support themselves. President Roosevelt developed the beginnings of this system, where workers paid through taxes to provide retirement insurance for themselves. Years later, President Eisenhower offered Social Security benefits to the disabled. Today, one in seven Americans receives Social Security benefits and must keep updated on the program and income taxes assessed against payments.
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Federal Taxes
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Tax rates on Social Security benefits are based entirely on the level of additional income the beneficiary is receiving. In 2010, for individuals with income under $25,000 ($32,000 for those married and filing jointly), the Social Security benefit is not taxable. Reported income between $25,000 and $34,000 ($32,000 and $44,000 for married joint taxpayers), however, will have up to 50 percent of Social Security benefits taxed. For income above $34,000, the federal cap is up to 85 percent of Social Security benefits taxed.
Supplemental Security Income
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Supplemental Security Income (SSI) is designed to give additional financial help to aged, blind, or disabled people who have little to no income. The administration of this program and the payments are handled by the Social Security Administration, yet the funds do not come from the Social Security fund. General tax revenue, withdrawn from the United States Treasury, funds SSI. Even though the same administration handles the applications and disbursement of the monies, SSI is not the same as Social Security benefits. According to the SSA, this income is not taxable.
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State Taxes
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Each state has its own laws regarding a state income tax. As of 2011, nine states did not have an income tax. Of the remaining 41states, 21 have laws prohibiting state income taxation of Social Security benefits. Other states use levies, percentage of gross income guidelines or federal tax percentages that may result in a tax on Social Security benefits.
Special Circumstances
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Children who receive the Social Security Survivor Benefit may have to pay taxes if their income is significant. The SSA recommends that if a surviving spouse receives a benefit as well as a surviving child, income tax should be figured separately to accurately determine if the child will need to pay. If the SSA issues back payments of benefits, the beneficiary cannot alter previous tax returns on the basis of those payments but has several options for how to figure income tax on such a lump-sum payment. SSA worksheet Publication 915 details options on lump-sum elections. Overpayment of Social Security benefits can occur and the SSA then has the right to withhold the overpayment from any income tax refund due to the beneficiary.
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