Have you ever wondered why your social security income is taxable? Tax and financial planning should require an analysis of your social security benefits. Understanding these basic rules can help you reduce your social security benefits taxable.
The amount of Social Security benefits taxable to you are calculated off of a special formula. There are lots of terms for this formula, we will refer to it as the provisional income formula.
If you want to follow the full worksheet and receive the exact taxable numbers take a look at the IRS Pub 915.
- The Simplified Explanation: Gross income items + half of SS benefits = Social Security Provisional Income Base
The formula above IS A SHORT VERSION of what the actual worksheet provides. If you want to calculate your provisional income, make sure to use the publication I provided and follow the worksheet, or have a tax professional calculate it.
Pub 915 shows us that the includable provisional income is D below:
A = half of social security benefits received B = your taxable pensions, wages, interest, dividends, and other taxable income C = exempt interest income (such as interest on municipal bonds) plus any exclusions from income listed in Pub 915 D = Sum of A, B and C
According to Pub 915, 50% of your benefits are taxable when your provisional income is greater than.
If your provisional income goes $12,000 over the base listed above, (which is $44k for married), you need to multiple the excess by 85% to include an additional amount on top of the 50%. This is illustrated below.
The maximum amount of your Social Security benefits legally taxable are 85% of your benefits. No more than 85% of your benefits will be included as taxable income.
Below are two scenarios. A married couple, one receiving $4,000 in additional income to social security, one receiving only an additional $2,000.
- The illustrations are hypothetical and will be different on every tax return based on their unique tax situation.
Married Couple with $4k in additional included income.
| A | Additional Gross Income | $ 48,000 |
| B | SS Benefits | $ 34,000 |
| C | 50% of Benefits | $ 17,000 |
| D = A + C | Sample Provisional Income | $ 65,000 |
| Benefits Taxable | ||
| E = B * 50% | 50% > 32k | $ 17,000 |
| F = (A+C) – 44k | Amount over 44k | $ 21,000 |
| F *.85 | Excess * .85 | $ 17,850 |
| E + F | Total Benefits Taxable | $ 34,850 |
| B *.85 | 85% of Benefits Limit | $ 28,900 |
| Actual Taxable | $ 28,900 |
Married Couple with $2k in additional included income.
|
The provisional income is higher for the couple with $4k in includable income. More of their social security benefits become taxable because of this. If their marginal tax rate is 25% the additional $11,900 in taxable benefits cost $2,975 in taxes. That results in a $2,975 decrease of net benefits you receive.
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Joe Arsenault
Joe Arsenault is a CPA, tax professional and avid blog writer. Joe founded CafeTax in 2010 and is the President of Arbor Financial & Tax, PLLC. Joe doesn't just prepare taxes and perform tax planning services, he also specializes in retirement taxation by consulting with his clients and other financial advisers. If you don't want to talk business, Joe loves sports and almost every outdoor activity.
3 Responses to Why Are My Social Security Benefits Taxable??
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Why should my SS Benefit be taxed in the first place?
Tax paid on a tax sounds unfair!!