How is Social Security taxed?

Social Security can be taxed at up to 85%, however, getting to that taxable Social Security number can be, well, confusing... so, let's break it down!

The taxation of Social Security is based on what Social Security defines as Combined Income. This is also 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 

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

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

• file a federal tax return as an "individual" and your combined income* is
  • between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $34,000, up to 85 percent of your benefits may be taxable.
• file a joint return, and you and your spouse have a combined income* that is
  • between $32,000 and $44,000, you may have to pay income tax on up to 50 percent of your benefits.
  • more than $44,000, up to 85 percent of your 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, you would apply the taxation for each of those thresholds in determining the "taxable chunk" of each respectively. If these amounts when added together is less than or equal to 85% of Social Security, then that is the taxable amount of Social Security benefits; however, if the amount is greater than 85%, then the taxable amount of Social Security will automatically revert to the overarching "up to 85%" rule on Social Security taxation. 

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 

$500 of Tax- Exempt Interest

$1,000 of Taxable Interest

$30,000 in IRA Distributions 

$5,000 in Capital Gains income 

That said, 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%) 

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%)

Let's add up those "taxed chunks" from above: $0 + ($12,000 * .50) + ($12,500 * .85) = $16,625, which is 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.