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How Taxation of Social Security Benefits Works

taxation of social securityYou probably are aware that a portion of your Social Security retirement benefit may be taxable.  Do you know how the tax is calculated?  Or how the taxable portion of your benefit is determined?

The Rules

There are a couple of different levels of income that determine how much of your Social Security Benefit is taxed.

But first we must define Modified Adjusted Gross Income (MAGI). This is your Adjusted Gross Income (line 37 of Form 1040) plus all of your tax-exempt income.

Next is to define Provisional Income (PI). This is your MAGI plus 50% of your Social Security benefits.

Now to the taxation levels: The first taxation level is $32,000 of Provisional Income for a married couple filing jointly (MFJ) or $25,000 for single, head of household and qualifying widow(er) filing statuses.  If your Provisional Income is less than this first level for your filing status, none of your Social Security benefit is taxable.

The second taxation level is $44,000 for MFJ or $34,000 for the single filing statuses.  If your Provisional Income is greater than the first taxation level but less than the second taxation level, then as much as 50% of your Social Security benefit may be included as taxable income.

If your Provisional Income is above the second taxation level, then up to a maximum 85% of your Social Security benefit may be included as taxable income.

Like most calculations in the tax code or where Social Security is involved, it’s a mess to understand.  I’ll give you some examples below to illustrate how this works.

Examples

Here are a few examples:

Example 1. Married Filing Jointly, MAGI = $15,000; SS = $15,000; therefore Provisional Income (PI) = $22,500

1. MAGI $15,000
2. Half of SS Benefit $7,500
3. Provisional Income (PI) line 1 plus line 2 $22,500
4. First Taxation Level $32,000
5. Subtract line 4 from 3 – if less than zero, enter zero $0
6. Multiply 50% Level by .5 $0
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $0
11. Multiply line 2 by 1.70 $12,750
12. Lesser of line 10 or line 11 is added to your income as taxable $0

Since the PI is less than the First Taxation Level, none of the SS benefit is taxed.

Example 2. Married Filing Jointly, MAGI = $25,000; SS = $20,000; PI = $35,000

1. MAGI $25,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $35,000
4. First Taxation Level $32,000
5. Subtract line 4 from line 3 $3,000
6. Multiply 50% Level by .5 $1,500
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 – if less than zero, enter zero. $0
9. Multiply line 8 by .85 $0
10. Add line 6 and line 9 $1,500
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $1,500

Since the 50% taxation level amount is greater than zero, half of the amount above the 50% taxation level will be added to the taxable income for the couple.  None of the benefit is included at the 85% taxation rate.

Example 3. Married Filing Jointly; MAGI = $45,000; SS = $20,000; PI = $55,000

1. MAGI $45,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $55,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $23,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $11,000
9. Multiply line 8 by .85 $9,350
10. Add line 6 and line 9 $15,350
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $15,350

Since the SS benefit is greater than the upper taxation limit, a portion of the benefit is included at the 50% rate, and another portion is included at the 85% rate, for a total addition of $15,350 to taxable income for the couple.

Example 4. Married Filing Jointly; MAGI = $55,000; SS = $20,000; PI = $65,000

1. MAGI $55,000
2. Half of SS Benefit $10,000
3. Provisional Income (PI) line 1 plus line 2 $65,000
4. First Taxation Level $32,000
5. Subtract 1st from PI (50% level) $33,000
6. Multiply 50% Level by .5 – if more than $6,000, enter $6,000 $6,000
7. Second Taxation Level $44,000
8. Subtract line 7 from line 3 $21,000
9. Multiply line 8 by .85 $17,850
10. Add line 6 and line 9 $23,850
11. Multiply line 2 by 1.70 $17,000
12. Lesser of line 10 or line 11 is added to your income as taxable $17,000

Since the PI is greater than the 85% level, we did the same type of calculation as in Example 3, except that this time the total of the 50% taxed amount and the 85% taxed amount was greater than 85% of the overall SS benefit, so only that amount ($17,000) is added to the taxable income for the couple.

Hopefully these examples will help you to better understand how the amount of taxable Social Security benefit is calculated for various situations.

4 Comments

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