Tax on Social Security Simplified
Tax on Social Security is an issue for John and Susie. Let’s use their story as an illustration for how Social Security Benefits are actually taxed.
- John and Susie felt like there should be no Tax on their SS benefits. After all, they paid into the system all their working life.
- They thought that after years of contributing into the system, there would be no Tax on their Social Security benefits
- To some extent, they were right.
- Tax paid on Social Security benefits depends on how John and Susie answer a few specific questions.
Will John and Susie Pay Tax?
Provisional Income
The first question that determines if John and Susie will pay tax on social security is provisional income.
- If John (or Susie) was a single filer with provisional income above $25,000, they would pay tax on social security.
- Since John and Susie are married filing jointly, if they have provisional income above $32,000, they will pay tax on social security.
- If you (or John and Susie in this case) have a total income below these thresholds, you will not pay tax on social security benefits.
That Was Too Easy… Tax Stuff Is More Complicated
What type of income is counted to determine if you pay taxes on your social security benefits?
Provisional Income Is Calculated Based On Three Items
1. Adjusted Gross Income
- Pensions,
- Wages,
- Interest,
- Ordinary Dividends, and
- Capital Gain Distributions
2. One-half of your Social Security benefits
3. Any tax-exempt interest income (typically, this is not taxed, however, it is added for the sake of the calculation)
How Much Social Security Benefit Gets Taxed?
Once your provisional income is calculated, you can then figure out how much of your Social Security benefits will be taxed. Here’s a handy little government chart to illustrate the Tax on Social Security benefits:
Putting It All Together
John and Susie are a married filing jointly and as a couple they have the following…
- $40,000 in income,
- $10,000 in tax-exempt income, and
- $50,000 in Social Security benefits
John and Susie’s Provisional Income Calculation:
John and Susie are considered to have $75,000
- $40,000 income plus,
- $10,000 in tax exempt income plus,
- $25,000 (one-half of the total SS benefits received)
Because John and Susie’s provisional income is over the $44,000 threshold, 85%, or $63,750 of their $75,000 of benefits will be taxed.
State Tax on Your Social Security Benefits
- Everything discussed above is related to Federal Taxes paid on social security benefits.
- Depending on where John and Susie live, a state income tax may also apply.
- Here’s another handy government chart to help John and Susie decide where to live in retirement:
When Tax Math is Too Complicated
- Software and/or online calculators make this math fairly easy, however…
- You should be aware of the fact that paying Taxes on Social Security Benefits is, well, a real thing to consider.
As always, we recommend that you speak to a CFP® professional for more details on your situation.
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