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Social Security Taxation

Social Security can be taxed at up to 85%; however, getting to that taxable Social Security number can be confusing.

The taxation of Social Security is based on what Social Security defines as Combined Income, sometimes referred to as Provisional Income.

Combined Income is defined as:

½ of your Social Security benefits

+ tax-exempt interest

+ wages

+ taxable interest

+ dividends

+ IRA distributions

+ pension income

+ capital gains

+ any income reported on Schedule 1, Line 10 

Combined income includes adjusted gross income, tax-exempt interest income, and one-half of the annual Social Security benefits.

Depending on the amount of combined income, anywhere between 0-85% of Social Security may be taxable, as described on page 7 of Publication 915.

There is a calculator icon Calculator Icon built within Scenario Analysis that will show the math used in calculating the taxable portion of Social Security. 


Next, the combined income amount is then applied against or within the respective taxable income brackets for each filing status, as outlined by the Social Security Administration in order to determine the taxation on the Social Security benefit amount.

If a client:

  • files a federal tax return as an individual and their combined income is
    • between $25,000 and $34,000, they may have to pay income tax on up to 50 percent of their benefits.
    • more than $34,000, up to 85 percent of their benefits may be taxable.
  • files a joint return, and both taxpayers have a combined income that is
    • between $32,000 and $44,000, they may have to pay income tax on up to 50 percent of their benefits.
    • more than $44,000, up to 85 percent of their benefits may be taxable.
  • are married and file a separate tax return, you probably will pay taxes on your benefits.

After determining each taxable amount for the brackets shown above, apply the taxation for each of those thresholds in determining the taxable portion of each respectively.

If these amounts, when added together, are less than or equal to 85% of Social Security, that is the taxable amount of Social Security benefits.

If the amount is greater than 85%, the taxable amount of Social Security will automatically revert to 85%.

Let's try an example out for good measure...

Example: Jon & Mary Smith are a married couple filing jointly on this year's taxes and have the following income sources: 

$40,000 in Social Security benefits (only 1/2 is included in combined income)

$500 of Tax- Exempt Interest

$1,000 of Taxable Interest

$30,000 in IRA Distributions 

$5,000 in Capital Gains income 

Their combined income for the year would be a total of $56,500. 

Next, this $56,500 is then distributed amongst the income bracket(s) noted above for a MFJ couple. See the breakdown below: 

Less than $32,000 = taxed at 0% (this means, $32,000 of the $56,500 is taxed at 0%)

Between $32,000 and $44,000 = taxed at up to 50% (this means, $12,000 of the $56,500 is taxed at 50%) 

If the combined income amount is greater than $44,000, simply use $6,000 here: $12,000 x 50%.  

Greater than 44,000 = taxed at up to 85% of the benefits (this means, the remaining $12,500 of the $56,500 is taxed at 85%)


Adding up this information: $0 + ($12,000 x 50%) + ($12,500 x 85%) = $16,625, or 42% of the combined Social Security benefit amount totaling $40,000. Since this is less than 85% of total Social Security benefits, the taxable amount of Social Security benefits will be equal to $16,625 or 42% of the combined Social Security benefits for Jon and Mary Smith.  

The "up to 85%" overarching rule applied to the example above would mean that no more than $34,000 of the total benefits would ever become taxable for Jon & Mary Smith in this example tax year, since $40,000 * 85% = $34,000. 

 

In Scenario Snalysis, enter the gross Social Security benefit, and we will automatically calculate the taxable portion. Click on the calculator icon to see how this is calculated on Publication 915.

SS1

The Tax Report will also show a breakdown of this calculation for easy reference:

SS2