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What's the Deal with Having to Pay Federal Income Tax on SS Benefits?

We hear constantly how little many of us will be paid in Social Security benefits, so how can it be possible to have to be taxed on those benefits? Some people must pay federal income taxes on their Social Security payments. This usually only happens if you have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) inTax addition to your benefits.
No one pays federal income tax on more than 85 percent of his or her Social Security benefits based on Internal Revenue Service (IRS) rules.  Here are the specific rules:
Filing Individually:  If your combined income* is between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits. If you have more than $34,000 in income, up to 85 percent of your benefits may be taxable.
Filing Jointly:  If you and your spouse have a combined income* that is between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits. If you have an income of more than $44,000 jointly, you and your spouse may have to pay income tax up to 85 percent of your benefits.
Married Filing a Separate Tax Return: You will probably pay taxes on your benefits.
*Note:  Your adjusted gross income + nontaxable interest + 1/2 of your Social Security benefits = your “combined income.
From the Social Security Administration:
“Each January you will receive a Social Security Benefit Statement (Form SSA-1099) showing the amount of benefits you received in the previous year. You can use this Benefit Statement when you complete your federal income tax return to find out if your benefits are subject to tax. 
 

“If you currently live in the United States and you misplaced or didn’t receive a form SSA-1099 or SSA-1042S, you can now can get an instant replacement form by using your online my Social Security account. If you don’t already have an account, you can create one online. To get your replacement form SSA-1099 or SSA-1042S, go to Sign In or Create an Account.
“Once you are logged in to your account, select the Replacement Documents tab to request the form.
“If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have federal taxes withheld from your benefits.
“For more information about taxation of benefits, read page 14 of our Retirement Benefits booklet or IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.shutterstock_128683532 (534x800)
After this brief discussion on the horrible situation of having to pay tax on benefits that have already been taxed, allow me to prove to you the incredible value of the Social Security benefits, even in the face of all this.
Let’s look at a real life situation. At age 66/67 ( full retirement age according to the SSA) they project that you should receive $1,680 a month. If you live to what is on the current Life Expectancy Chart, men will die at age 82 and women at 86. So if a man retires at age 67 and lives to age 85, that means he has 18 years of Social Security benefits coming to him:  18 years X 12 months per year X $1,680 per month = $362,880 to be paid to you or your spouse.
Referring back to this Life Expectancy Chart again, if a married couple retires at age 66 or 67, statistics prove one of them will live to be age 92. Age 92, minus age 67 = 25 years X 12 months X $1,680 per month = $504,000 income.
I am referring the SSA Web site and using their example entitled WANDA WORKER, located at 456 ANYWHERE AVENUE, MAINTOWN, USA 11111-1111. WANDA paid in during her working years $31,322, and her employer paid $33,112. Add these two sums of money that have been deposited into Social Security Trust Fund and you get $64,434. Now divide by $1,680 a month and you get 38 months that Wanda will received money back that was deposited for her. However, because she only put in $31,322, this means she will be completely paid back in one-and-a-half- years. But, although she only contributed $31,322 during her working life, on average she will receive as a single person $363,880 (as demonstrated above based on the SSA’s life expectancy tables and their obligation to pay SS benefits until your death), or as a married couple $504,000. Wanda is getting a great deal!!! We can guess that the SSA will not disrupt or disturb any citizen that has already reached age 55 or above, simply because they have already paid into the Social Security Trust Fund most of their wSocial Securityorking life. To alter this now, at their age, would cause mutiny in the streets (if you’re younger than age 55, then the story is a bit different for you but that is a blog for another time).
I hope that you can see that the average worker in America over age 55 will receive over $350,000 in their retirement years. This number will be larger than any pension or 401(k) income. And this income is not subject to market risks or fluctuations. So until the government goes broke, Americans have a sweet deal.
It is so very important that you know what your benefits are and how to maximize them.  If you are not on top of what you can expect to receive in Social Security benefits when you retire, now is the time to explore that issue so you can put those numbers into your retirement plan in preparation for the future.
If you want to know how to create a predictable retirement plan where you cannot outlive your benefits, please contact me (801) 292-1099, ext 2.

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