Your Social Security taxes pay for three kinds of benefits; retirements, disability, and survivors. To be eligible for Social Security benefits you need a certain number of credits.
How do you earn this credit? You earn this credit toward Social Security benefits when you work. To become eligible to earn credit for Social Security Benefit, you must pay Social Security tax.
You can earn a maximum of 4 credits each year, and you need 40 credits to receive a Retirement benefit. (To apply for other benefits, the credits you need to depend on your age and the type of benefit you are applying for.)
Generally, a worker with average earnings can expect a retirement benefit that replaces about 40 percent of his or her average lifetime earnings, therefore, you can not only rely on Social Security benefits. Social Security should never be intended to be your only source of income when you retire, become disabled, or your family’s only income if you die. It is intended to be a supplement of your savings, investments, pensions and insurance plans.
Some people must pay federal income tax on their Social Security benefits. This usually happens only if you have other substantial incomes (such as wages, self-employment, interest, dividends and other taxable income that must be reported in your tax return) in addition to your benefits. If your Social Security benefit was your only income for that year, you are exempted from Federal income tax.
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. If you:
- File a federal tax return as an “Individual” (Single, Head of Household, Qualifying Widow), combined income is,
- If total combined income is below $25,000 ~ $34,000, then 50% of your Social Security Benefit is a taxable amount.
- If total combined income is above $34,000, then 85% of your of Social Security Benefit is a taxable amount.
- File a joint return, if you and your spouse have a combined income that is,
- If the combined income is below $32,000 ~ $44,000, then 50% of your Social Security Benefit is taxable amount.
- If the combined income is above $44,000, then 85% of your Social Security Benefit is a taxable amount.
- When a married couple is living together, and filed separately, 100% of Social Security Benefit is the taxable amount.