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Question: Are Social Security benefits subject to income taxes?
Answer: It depends on the taxpayer’s other income. Up to 85% of an individual’s Social Security benefits could be taxable. This doesn’t mean the taxpayer can lose up to 85% of her benefits; it simply means the taxable portion of her benefits may be added to gross income and taxed at her normal tax rates.
The first step in calculating what, if any, portion of a taxpayer’s Social Security retirement benefits are taxable, the taxpayer must calculate her provisional income for the year. Provisional income is generally the sum of:
- (1) The individual’s adjusted gross income (AGI);
- (2) Her tax-exempt interest (e.g., interest from municipal bonds); and
- (3) Half of her Social Security benefits.
For example, if an individual’s AGI is $22,000, and she earns $3,000 of interest from tax-exempt municipal bonds and $14,000 in Social Security benefits, her provisional income is $32,000 ($22,000 AGI + $3,000 tax-exempt interest + ½ of her $14,000 Social Security benefits).
The next step is to compare the individual’s provisional income to the base amount and adjusted base amount. The applicable base amount depends on filing status:
|Filing Status||Base Amount||Adjusted Base Amount|
|Married filing jointly||$32,000||$44,000|
|Married filing separately and lived apart during the year||$25,000||$32,000|
|Married filing separately and lived together during the year||$0||$0|
The base amounts are not indexed for inflation.
If provisional income is less than or equal to the applicable base amount, none of the taxpayer’s Social Security retirement benefits are taxable. If the provisional income is larger than the base amount, a portion of the benefits may be taxable.
For a taxpayer whose provisional income exceeds the applicable base amount, but not the adjusted base amount, she must include in gross income the lesser of:
- 50% of the excess provisional income over the base amount; or
- 50% of the Social Security benefits received that year.
For example, suppose Maude, who files as an unmarried taxpayer, had $30,000 provisional income with $12,500 in Social Security retirement benefits. Her provisional income exceeded her base amount by $5,000 ($30,000 provisional income over the $25,000 base amount), which is less than her $12,500 Social Security benefits; therefore she will include half of the excess amount, $2,500, in her gross income for the year. This results in her paying taxes on 20% ($2,500 of her $12,500 yearly benefit) of the benefits she receives.
Additionally, if a taxpayer’s provisional income exceeds the applicable adjusted base amount, 85% of the excess is generally taxable. However, the highest total percentage of Social Security retirement benefits that may be taxable is 85%.
Here’s an example. Say that Maude received a Social Security retirement benefit of $24,000 last year. Also assume she had other income of $30,000 for the year, making her provisional income $42,000 ($30,000 AGI plus ½ of half her $24,000 retirement benefits).
For the first $9,000 of provisional income over the base amount, but less than the adjusted base amount, the tentative amount taxable is $4,500 (50% of $9,000).
For the extra $8,000 of provisional income over the base amount, the tentative amount taxable in this segment is $6,800 (85% of $8,000).
The sum of these two segments is $11,300, meaning she tentatively adds this amount to her gross income. We say these amounts are tentative because she can’t add more than 85% of her total Social Security benefits to gross income. Since 85% of her $24,000 Social Security benefits ($20,400) is more than the tentative amount of $11,300, $11,300 of Maude’s Social Security benefit is taxable.
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