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Planning for More Social Security Benefits in 2022

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The unusually large dollar increase for Social Security recipients may be welcome news, however the Cost-of-Living Adjustment (COLA) is to increase payments by 5.9 percent, while the 2020 and 2021 COLA increases were each under two percent.

Nov 3rd 2021
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Clients that are Social Security recipients are set to see significantly higher payments in 2022, but the downside to this news is that the increase is caused by a higher cost of living.

For many recipients, this can translate into more than $1,000 in annual increase. This increase would appear to benefit over 60 million recipients. Social Security benefits should have increased payments beginning in January, 2022. 

The measure of an individual’s Social Security benefits can be complicated. The earliest a person can begin receiving Social Security retirement benefits remains age 62. 

Social Security provides a “Retirement Age Calculator” which can measure the individual’s “full retirement age.” This is when the individual is eligible for unreduced retirement benefits (See “Social Security, Retirement Benefits,” https://www.ssa.gov/benefits/retirement/planner/ageincrease.html; see also the Social Security booklet, “How Work Affects Your Benefits,” http://www.ssa.gov/pubs/EN-05-10069.pdf).

Even if you qualify for unreduced retirement benefits, you can experience reduced Social Security checks due to higher levels of income reported on your Form 1040. This can be due to increased Medicare premiums offsetting your Social Security benefits.

Who Pays for the Program?

The FICA tax and Social Security programs are not identical in all details but basically the FICA tax funds the program for employees, and the self-employment tax funds the program as to the self-employed.   When it comes to getting your Social Security benefits, it doesn’t matter whether payments arose from employment or self-employment, or the combination of those two sources of income.

Workers pay 6.2 percent of gross pay, as do employers, up to a 2021 maximum of earnings of $142,800. The 2022 maximum is $147,000.

There is also the 1.45 percent Medicare tax which applies without a maximum in earnings. This tax applies to both the employee and employer.

Self-employed pay both halves; i.e. 12.4 percent and 2.9 percent, or 15.3 percent, usually using Form 1040 Schedule C then Schedule SE. There are certain adjustments...

The self-employed also get to deduct the “employer-equivalent of your self-employment tax in figuring your adjusted gross income.” (See “Self-Employment Tax (Social Security and Medicare Taxes) irs.gov). There is also a 0.9 percent Medicare tax that can reach wages and self-employment income above the year’s threshold amount. 

There are few exemptions from the FICA tax. Social Security benefits are not wages or business income subject to FICA or self-employment tax.

Taxability of Social Security Benefits

The taxability of Social Security payments is subject to a unique federal provision (Sec. 86). In general, Social Security benefits may be tax free, can often be 50 percent taxable, but aren’t taxed beyond 85 percent of the benefits.

“Generally, up to 50 percent of your benefits will be taxable. However, up to 85 percent of your benefits can be taxable if either of the following situations applies to you:

  • The total of one-half of your benefits and all of your other income is more than $34,000 ($44,000 if married filing jointly).
  • You are married filing separately and lived with your spouse at any time during 2020.” (“Social Security and Equivalent Railroad Retirement Benefits,” for use in preparing 2020 Returns, IRS Pub. 915, p. 6; see also “Retirement Benefits, Income Taxes and Your Social Security Benefit,” http://www.sss.gov).

The rules governing the taxability of Social Security focus more on the recipient’s total income, not the amount of Social Security benefits. A taxpayer with significant other taxable income will likely pay tax on Social Security benefits, even if the measure of those benefits in the year in small.

Assume the individual paid into the Social Security system for years via a share of FICA as an employee and/or self-employment tax as a business owner.  Further assume the taxpayer paid in $50,000 and received initial Social Security benefits of $1,000 in 2021. 

Can the taxpayer then argue Social Security isn’t taxable until payouts from the system exceed the individual’s payments into the system? No.

Payments into Social Security constitute a tax and that tax is not a cost that yields recoverable basis.  It is quite possible to pay $50,000 into the system, recover only $1,000 in one’s lifetime and yet owe income tax on the $1,000.

The taxable portion of benefits under Social Security is subject to the requirements for making estimated tax payments (See 2021 Form 1040-ES, p. 1).

State Taxation

Most states, including New York and California, do not tax these benefits.  There are thirteen states which do tax the benefits in some circumstances.  These states are:

  • Colorado
  • Connecticut
  • Kansas
  • Minnesota
  • Missouri
  • Montana
  • Nebraska
  • New Mexico
  • North Dakota
  • Rhode Island
  • Utah
  • Vermont
  • West Virginia

The details of each state’s taxation rules for Social Security benefits vary significantly.  For a brief discussion of each state’s rules, see “Which states tax Social Security benefits?” AARP Social Security Resource Center,  Some States Tax Your Social Security Benefits (aarp.org).

SSI Program for Those in Need

Understanding this program can sometimes help the client by helping less fortunate family members.

Most of us equate Social Security with the usual age-related payments but there are also Supplemental Security Income payments. The SSI “program provides monthly payments to adults and children with disability or blindness who have income and resources below specific financial limits.” (“Supplemental Security Income,” Social Security, https://www.ssa.gov/benefits/ssi).  

SSI can reach those aged 65 and older without disabilities who meet the financial requirements.  This is a Federal program funded from general tax revenues, not Social Security taxes.  Payments can vary depending on whether the state adds funds to the federal program. 

The program may be administered by Social Security.  It is sometimes run by a particular state (See “Understanding Supplemental Security Income SSI Benefits – 2021 Edition,” https://www.ssa.gov/ssi/text-benefits-ussi.htm).

Increased payments with this program are scheduled to begin in December, 2021 and reach roughly 8 million recipients.

Social Security’s Importance

A better understanding of a client’s Social Security circumstances can be important in planning.  The tax planner’s projections may also surface controllable items that might affect even the degree of taxability of Social Security benefits.

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