You’d think that, after working all your life and now that you’re in a position to retire and start taking Social Security retirement benefits, that you could get a break and not have to pay income tax. But alas, Social Security retirement benefits may be taxable to you, depending upon your income level. And in truly typical bureaucratic style, it’s not a simple question to determine 1) IF your benefit is taxable; or 2) what rate or amount of your benefit is taxable; or even 3) what income is counted to determine if your benefit is taxable. (If you’d like to read some more about this subject, check out my book, A Social Security Owner’s Manual.)
Determining Provisional Income
In order to figger out if your Social Security benefit is to be taxed at all, we first have to calculate a relatively unknown sum known as Provisional Income (PI). What this boils down to is your Adjusted Gross Income plus any tax-exempt income, plus any excluded foreign income, plus 50% of your gross Social Security benefit. If you’re interested in just which lines on the 1040 return these are, here’s a list:
- Form 1040 Line 1, 2a, 2b, 3a, 3b, and 4b, plus Schedule 1, Line 22, plus 50% of your Social Security benefit – these income lines are all added together.
- Subtract the deductions (Schedule 1, Line 36) from the income items – if this number is zero or less, you don’t have to calculate any more. Your Social Security benefit is not taxable.
- IF, on the other hand, you come up with a positive number after this calculation, this number is your Provisional Income.
Once you’ve determined the Provisional Income, you’re ready to look at the “Base Amount”.
Comparing to Base Amount
So you have your Provisional Income calculated, now you need to compare that number to the Base Amount for your filing status. So, if your filing status is Married Filing Jointly, your Base Amount is $32,000. If your filing status is Single, Head of Household, Qualifying Widow(er) or Married Filing Separately and you lived apart from your spouse for the entire calendar year, your Base Amount is $25,000. (Note: if your filing status is Married Filing Separately and you lived with your spouse at any time during the calendar year, see the special section at the bottom of this article for information about your benefit’s taxability.)
Okay – so now that you know your Base Amount, you compare that number to the Provisional Income number that you came up with previously. If your Provisional Income is less than your Base Amount – you can stop, because none of your Social Security benefit is taxable.
However (and there’s always a “however” in life, right?) if your Provisional Income is greater than the Base Amount – hang in there, you have some more figgering to do. And guess what? There’s more complexity involved! Yippee!
Incremental Amount
If you’ve determined that your Provisional Income is greater than your Base Amount. This indicates that some of your Social Security benefit is going to be taxed. This next calculation determines just how much of the benefit will be taxed. If your Base Amount is $32,000 (your filing status is Married Filing Jointly) then you have an Incremental Amount of $12,000. If your Base Amount is $25,000, then your Incremental Amount is $9,000.
When you subtract the Base Amount from your Provisional Income – is the figure you’ve come up with more or less than your Incremental Amount? If less, then 50% of the Provisional Income minus the Base Amount will be taxable, and you’re finished with calculations. (Don’t worry, we’ll work through a couple of examples to try to clear this up.) If the amount that you came up with was greater than your Incremental Amount, then at least 85% of the amount above the Incremental Amount plus the Base Amount will be taxed – but more calculations are required.
Final Calculation
If the amount of Provisional Income is in excess of your Base Amount plus the Incremental amount, which is your Excess Provisional Income, there is another calculation to complete. Take 50% of your Incremental Amount, and compare it to 50% of your overall Social Security benefit. Whichever number is smaller, add that number to 85% of your Excess Provisional Income. Then lastly, multiply your total Social Security benefit by 85%, and compare this number to the one you just came up with – whichever is smaller is the amount of Social Security benefits that is taxable.
Confusing enough? Let’s walk through a couple of examples to clarify.
Example 1 – Married Filing Jointly
| 1) AGI Excluding SS Benefits | $30,000 |
| 2) + Tax exempt interest | $1,000 |
| 3) = Modified AGI | $31,000 |
| 4) + 50% of SS Benefits | $10,000 |
| 5) = Provisional Income (PI) | $41,000 |
| 6) – Base Amount (BA) | $32,000 |
| 7) = Excess PI over BA | $9,000 |
| 8) – Incremental BA | $12,000 |
| 9) = Excess PI (if <0, enter zero) | $0 |
| 10) Smaller of line 7 or line 8 | $9,000 |
| 11) 50% of line 10 | $4,500 |
| 12) smaller of line 4 or line 11 | $4,500 |
| 13) 85% of line 9 | $0 |
| 14) Add lines 12 and 13 | $4,500 |
| 15) SS Benefits times 85% | $17,000 |
| 16) Smaller of line 14 or 15 is your taxable benefit | $4,500 |
Example 2 – Married Filing Jointly
| 1) AGI Excluding SS Benefits | $50,000 |
| 2) + Tax exempt interest | $2,000 |
| 3) = Modified AGI | $52,000 |
| 4) + 50% of SS Benefits | $10,000 |
| 5) = Provisional Income (PI) | $62,000 |
| 6) – Base Amount (BA) | $32,000 |
| 7) = Excess PI over BA | $30,000 |
| 8) – Incremental BA | $12,000 |
| 9) = Excess PI (if <0, enter zero) | $18,000 |
| 10) Smaller of line 7 or line 8 | $12,000 |
| 11) 50% of line 10 | $6,000 |
| 12) smaller of line 4 or line 11 | $6,000 |
| 13) 85% of line 9 | $15,300 |
| 14) Add lines 12 and 13 | $21,300 |
| 15) SS Benefits times 85% | $17,000 |
| 16) Smaller of line 14 or 15 is your taxable benefit | $17,000 |
Hopefully these two examples will clear things up a bit. If you are in one of the Single filing statuses, substitute your BA ($25,000) and Incremental BA ($9,000) where applicable.
Married Filing Separately, Having Lived With Your Spouse
If you have filing status of Married Filing Separately and you lived with your spouse at any time during the year, 85% of your Social Security benefit is always taxable. This is the maximum amount that can be taxed using the calculations illustrated above.
Sterling Raskie, MSFS, CFP®, ChFC®
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And if you’ve come here to learn about queuing waterfowl, I apologize for the confusion. You may want to discuss your question with Lester, my loyal watchduck and self-proclaimed “advisor’s advisor”.
I believe Line 10 should say the “smaller of Line 6 or Line 7” instead of the “smaller of Line 7 or Line 8” – The first 50% applies up to the Base Amount (Line 6) – not to the Incremental Amount (Line 8)
This means in the second example, Line 10 should now become the $30,000 from Line 7 and Line 12 becomes $15,000. No change in the end result of $17,000 social security taxable, but now it is even more dramatically less than Line 14 total of $31,300
I’ll review this, but I believe it’s correct as written. The 50% rate s high would apply to the whole amount if it’s equal to the base plus the incremental amount. Above the incremental amount, 85% kicks in.
I looked at the taxation issue some time ago and discussed in a post http://www.joetaxpayer.com/social-insecurity-redux/
It offers a visual (graph) of how with increasing income, the effect of SS taxation is to create some wild marginal rates, up to 47% for a single. I need to update that graph for 2010 rates.
Thanks for the link, Joe – that’s a great post, visually showing the impacts of SS taxation. Most helpful to understand the situation.
jb
Thanks, Jason. I should have pointed out that there are calculators like this – the article was intended to explain the process…
jb