What Is Social Security?
In order to achieve sustainable development of a country, the government introduces certain schemes to ensure that each and every citizen is able to maintain a healthy living.
In light of this, the Social Security scheme provides its beneficiaries with a certain percentage of income, when they are either disabled, retired, or deceased. Let us take a look at how the process works.
As an employee of a firm or business, you will receive your income from which a certain percentage will go towards the Social Security scheme. When you reach a certain age that is considered to be ideal for retirement, you will attain an ample amount of money from this scheme, with regards to your previous income.
This, in other words, is termed as your Social Security income. However, it is important to note that this income and its following benefits may be subject to taxation. In a nutshell, it is a cycle wherein the taxes are used to fund the overall program.
An Overview Of The Social Security Taxation Process
Many beginners who enter the world of social security and retirement schemes often wonder at what age one is considered to be a senior citizen, and how the process would apply to them.
Well, here is a small overview of how the entire system of social security benefits and taxation works. Firstly, every employee is charged a certain amount dedicated to social security by the employer.
This, in return, is used by the administration to provide monetary funds to those who are disabled, who are currently retired, and those who are considered survivors of the deceased people.
Thus, when you look at the cycle, it is repetitive and on-going with every employee and employer.
How Are Social Security Benefits And Taxes Calculated?
The first and foremost aspect for any social security policy is the income you, as a senior citizen, have earned when you worked, or are earning if you are currently working.
Furthermore, the overall size of your monthly benefit will depend on the year of birth, as well as your age when you first claimed the benefit.
In the case of taxes, it is important to know that your benefits are susceptible to taxation. In order to determine how much percentage or amount of taxes is deducted, there are certain thresholds that are formulated.
These thresholds provide people an insight into how the process of taxation on social security benefits works. The main purpose of such taxes, along with others, is to carry out the activities and priorities of the government.
Many people often wonder how these tax rates are determined. Well, it is calculated through a concept called a marginal tax rate. In a nutshell, the marginal tax rate is the amount of tax acquired on every extra dollar earned by the employee.
A rule of thumb is that as the income of an individual increase, the specified marginal rate of tax also increases. Thus, both are directly proportional.
Furthermore, it should be noted that the primary 15% of the benefits received are not taxed.
Therefore, with respect to the social security tax system and the overall tax rate, it is important for you to understand that these thresholds are prone to changes. If the marginal tax rate is lower, then your overall taxes from the social security benefits will also be lower.
Senior Citizens And Social Security Taxes
One of the frequently asked questions pertaining to senior citizens and social security taxes does senior citizens pay taxes on social security income. Well, to answer that question, it is important to understand the occupation of the citizens.
Often, many retirees will procure additional income for different sources. These may be from pension schemes, retirement policies, or other part-time jobs. All of these lead to the fact that yes, they do need to pay taxes on the benefits availed.
On the contrary, there may be certain exemptions, in accordance with which you would not have to pay taxes on social security income.
A classic example of the above are people who are disabled. Disabled people often face minimal or no taxation in terms of social security incomes.
Thus, in order to understand who has to pay taxes, it is crucial to understand the various categories available.
Below are a few groups to help you determine under which category you fall under. Firstly, people who earn a total income between a minimum of $25,000 and a maximum of $35,000, are taxed for at least 50% of their social security benefits.
Furthermore, in case your combined income rises above $35,000, you will probably be charged 85% of your social security income. It is important to note that the amount varies on your marital status i.e whether you are single or married. This will decide the percentage charged.
Therefore, in order to know whether a senior citizen is eligible for a tax on their social security benefit, you need to consider their incomes in the past, and accordingly identify the tax rate.
Age And Social Security Benefits
As mentioned above, it is clear that social security benefits and the respective taxation rates all revolve around a common age. In simpler terms, after a certain age, people are allowed to avail of their benefits.
This, in the field of social security, refers to the full retirement age. What does this mean? Well, in short, the full retirement age is the minimum age someone must be to avail of the benefits pertaining to their social security scheme.
Furthermore, the age has been increased over time by the administration of Social Security due to the rise in life expectancy. Earlier, the age was set to a minimum of 62 years. However, as of 2019, the age requirement has been increased to 67.
Many people often wonder at what age social security is not taxable. Well, the answer to that is, age does not restrict the benefit availability. In other words, age is not given equal importance when it comes to determining the taxation of benefits.
However, a minimum age requirement plays a role in allowing senior citizens to avail and claim their benefits as well as pay various taxes on them. But, apart from that, the regulations for paying taxes does not change as per the age of the person.
Another frequently asked question is, are social security benefits taxed after the age of 66? This is dependent upon whether you are continuing to work or not.
For example, if you retire, you are allowed to get a complete set of social security benefits. However, if you still continue to work even after reaching the age of 66 years, a portion of your received benefits may be subject to taxes.
Therefore, if required, senior citizens can postpone or delay the benefits received, until they actually retire. The biggest advantage of this is that they can acquire the delayed credit pertaining to retirement.
In a nutshell, this is the reward that people get for delaying the claim for their retirement benefit. A certain number of credits accumulate each month after you reach your full retirement age.
From the time of your FRA until the maximum age of 70, a senior citizen can delay the process of claiming their benefits. Eventually, during this time period, your total benefit will rise by 8% percent for every year you delay. Take a look at the example below to understand the process.
A classic example is the case of a wage earner. Hypothetically, if the person reaches the age of 67, but delays their claim till 70, then they can attain a maximum of 24% for their benefits.
However, it should be noted that once a senior citizen reaches the age of 70, the ability to acquire credits and delay the overall benefits is stopped. Thus, your monthly rewards will not increase.
Last but not the least, many people interested in the rules and regulations of social security schemes often ask for social security taxes after the age of 70. Well, to answer that, it should be highlighted that your current status for an occupation will not impact the taxation policy.
This simply means that irrespective of whether you continue to work, you will be subjected to taxes based upon your current or past earning income. However, if you are completely retired, then the main plus point is that you will not be prone to a reduction of the benefits.
In short, you, as a senior citizen of 70 years, are allowed to attain the complete benefits, irrespective of their overall income level.
Overall, the social security benefits are dependent upon previously earned incomes in the case of people who have retired. However, if they are still working, their current income is taken into consideration, and accordingly, the threshold is determined and taxes are charged.
Furthermore, if you reach the full retirement age i.e. 66 years, you can attain benefits, which may be reduced according to your status of work. This is still prone to taxation.
On the contrary, if senior citizens reach the age of 70, they are applicable for full benefits with no reductions.
Therefore, it can be concluded that some elderly citizens may be allowed to avail of tax-free benefits. But, it should be noted that these benefits may have some forms of reduction.