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Social Security Taxation

This article walks through how the taxable portion of Social Security is determined. 

The taxation of benefits is calculated based on what Social Security defines as Combined Income or, sometimes referred to as, Provisional Income. That combined income is then applied against brackets to determine the maximum percentage of taxable benefits. Once the maximum is determined, the taxable portion is calculated.

 

Calculating Combined Income

Combined Income: AGI (not including benefits) + Tax Exempt Interest + ½ of Social Security Benefits

wages

+ taxable interest, dividends

+ IRA distributions, pensions/annuities

+ capital gains

+ other income reported on Schedule 1, Line 10

+ tax-exempt interest

+ ½ of Social Security benefits

 

Determining the Maximum Percentage of Taxable Benefits

Combined income is applied against the following brackets, based on filing status, to determine the maximum percentage in which benefits are subject to taxation. 

If the taxpayer:

  • files single and their combined income is...
    • below $25,000, none of their benefits are taxable.
    • between $25,000 and $34,000, up to 50% of their benefits may be taxable.
    • more than $34,000, up to 85% percent of their benefits may be taxable.
  • files jointly and their combined income is...
    • below $32,000, none of their benefits are taxable.
    • between $32,000 and $44,000, up to 50% of their benefits may be taxable.
    • more than $44,000, up to 85% percent of their benefits may be taxable.
  • files separately and...
    • lived apart for the entire year, their taxable benefits are calculated as if filing single.
    • live together for any part of the year, 85% of their benefits are taxable.

Caution: A common misconception is that the taxable portion of Social Security benefits is always a flat 0%, 50%, or 85%. Instead, these thresholds determine whether benefits are taxable up to 50% or 85%. It's possible for benefits to be taxable anywhere between 0% and 85%!

 

 

Calculating the Taxable Portion of Benefits

The taxable portion of benefits is calculated using the client's combined income and applying against its respective backet. In the case of a joint filer...

  • their first $32,000 is taxed at 0%,

  • income between $32,000 and $44,000 is taxed at 50%,

  • and any excess income above $44,000 is taxed at 85%.

Example: A joint filer has $40,000 in gross Social Security benefits and a combined income of $56,500...

  • $32,000 is taxable at 0% for a taxable portion of $0,

  • $12,000 ($44,000 - $32,000) is taxable at 50% for a taxable portion of $6,000,

  • $12,500 ($56,500 - $44,000) is taxable at 85% for a taxable portion of $10,625,

  • for a total taxable portion of Social Security of $16,625 ($6,000 + $10,625), or 42% of gross benefits ($16,625 / $40,000).

Note: Taxable Social Security benefits are capped at 85%. Should this calculation exceed 85% of gross benefits, assume the taxpayer has reached the maximum 85% of taxable benefits. This means that taxable benefits cannot exceed $34,000 ($40,000 x 85%) in the example above.

 

 

How this Appears in Holistiplan

In the Scenario Analysis tool, the software will automatically calculate the taxable portion of Social Security based on the client's filing status and income when gross benefits are modeled.


You can follow along with the software's calculations on Publication 915 (page 16) by clicking on the calculator icon located to the left of the Taxable Social Security value:

The Tax Report also includes a section when Social Benefits are identified and will provide a breakdown how how the taxable portion was determined.