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Social Security Tax Calculation
 
To calculate the social security tax the taxpayer must include in taxable income:

      • Under the Old Rules the Lesser of: 1/2 the excess provisional income or1/2 the Social Security Benefit
      • Under the New Rules the lesser of 85% of the Social Security Benefit or 85% of the excess provisional income plus the lesser of the amount included under the old law or $6,000 for married filing jointly or $4,500 for single taxpayers.

Here are a few tools to help employees compute approximate tax liability and to determine personal withholding amounts. These tools are designed to provide estimations only.

Social Security (FICA) Withholding

The 2001 Social Security (FICA) tax contains two parts. The Social Security (Old Age, Survivors, and Disability Insurance) FICA tax is based on the first $87,900 paid at the rate of 6.2% with a maximum amount withheld of $5450. (Effective in 2005, wage base will increase to $90,000 with a maximum amount withheld of $5580.) The Medicare (Medical Hospital Insurance) FICA tax is based on all earnings paid, at the rate of 1.45%. (There is no limit on the Medicare FICA gross; The limit being eliminated as part of the Omnibus Budget Reduction Act of 1993). To determine withholding, add back all pre-tax retirement deductions (Tax deferred retirement amounts are not excludable from FICA tax.) to taxable gross - fed on the CMU earnings statement and multiply by the respective percentage for each portion of FICA.

A segment of Social Security benefits may be included in the gross income of a beneficiary where his or her “modified adjusted gross income” (a taxpayer’s adjusted gross income increased by tax-exempt interest and reduced by any income adjustments, such as contributions to an IRA plan or self-employed pension) exceeds a base amount.

The taxation of social security benefits falls under one of three categories:

      1. not taxable
      2. taxable to the extent of 50 percent of social security benefits
      3. taxable to the extent of 85 percent of social security benefits

Items 2 and 3 above refer to the utmost amount of social security benefits that are included in a taxpayer s taxable income calculation.

Modified adjusted gross income is adjusted gross income (before the determination of the taxable portion of social security benefits) plus tax-exempt interest.

Provisional income is modified adjusted gross income plus one-half of the social security benefits received.

If a taxpayer's provisional income is less than $25,000 for single taxpayers and $32,000 for married taxpayers social security benefits are not taxable.

If a taxpayer's provisional income is at least $25,000 but less than $34,000 for single taxpayers and at least $32,000 but less than $44,000 for married taxpayers up to 50 percent of social security benefits received are taxable.

If a taxpayer's provisional income is at least $34,000 for single taxpayers and $44,000 for married taxpayers up to 85 percent of social security benefits are taxable.

For single taxpayers with provisional income of at least $34,000 and married taxpayers with provisional income of a least $44,000 the formula for calculating the taxable portion of social security benefits received is the lesser of 85 percent of social security benefits or 85 percent of the amount by which a taxpayer s provisional income exceeds the base amount ($34,000 for single taxpayers and $44,000 for married taxpayers) plus the smaller of $4,500 for single taxpayers, $6,000 for married taxpayers or one-half of the social security benefits received.

It is important to remember that the above rules and terminology regarding the taxation of social security benefits are used only to calculate taxable social security. The taxable portion of social security benefits is included in a taxpayer's taxable income calculation.
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