Social Security is one of the cornerstone programs of the American Social Safety net – even if it doesn’t always completely cover a person’s retirement expenses, it gives everyone something to build off of when planning for their golden years. One thing some people may not realize, though, is that Social Security payments are taxed – even though the money is from the government to begin with. A new bill, though, may change that.
For help planning your retirement, including factoring in Social Security, consider working with a financial advisor.Taxes on Social Security: Current Law
As of 2022, Social Security payments are generally taxable. To see if will pay taxes on your Social Security, you’d need to first find your combined income using the following formula:
Combined Income = Adjusted Gross Income (AGI) + Nontaxable Interest + 1/2 of Social Security benefits
If that number is above $25,000, you’ll have to pay some tax if you are a single filer, head of household or qualifying widow or widower with a dependent child. The limit is $32,000 for married couples filing jointly. The exact amount of your Social Security benefit you pay taxes on depends on your total income, but it caps out at 85% of your benefits.
Some individual states also tax Social Security income. Make sure you check your state laws.Taxes on Social Security: New Proposal
A bill currently floating on Capital Hill, though, would make it so that the federal government takes no money from Social Security payments.The proposal is from Rep. Angie Craig (D.-Minn.) and is known as the You Earned It, You Keep It Act.
“Social Security is a promise we have made to the American people – if you work hard and play by the rules, the dignity of a secure retirement will be within your reach,” Craig said in a statement.
To make up for the lost revenue, Craig is proposing raising the cap on Social Security payroll taxes from $147,000 to $250,000.What This Means For You
First off, it doesn’t mean anything yet – the act is still just a proposal, and there are many steps it has to go through before it potentially takes effect. Even if there is currently enough support for the bill on Capitol Hill, there is an election coming up, and if the Republicans take control of the House legislation like this would likely be dead, at least for now.
That said, there is a possibility it will happen. If it does, high earners will see a bit more taken out of their paychecks each week. Retirees, though, would potentially see their net benefits go up as the government no longer takes a cut.
The individual changes would be small, but could add up to something worth thinking about. A financial advisor would be able to help you adjust your budget if your paycheck is worth less while working, and help you use any extra Social Security payments you get smartly.
Currently, many retirees pay taxes on their Social Security benefits. A new bill, though, would get rid of those taxes and make up for the revenue by raising the cap on payroll tax payments from $147,000 to $250,000.Retirement Planning Tips
- A financial advisor can help you figure out how Social Security will factor into your retirement plans. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Use SmartAsset’s retirement calculator to see how much money you’ll need in retirement and if you’re on pace to get there.
