Learn How Social Security is Taxed

There is an easy, less accurate way to calculate Social Security taxable amounts and there is a harder, more accurate way to calculate Social Security taxable amounts. I will share both ways so that one can estimate taxes owed on Social Security Income.

The Easy, Less Accurate Way

Social Security benefits are taxed based on your provisional income. After we find your provisional income, we will use it to find the percentage of Social Security that may be taxed. 

Provisional Income = Adjusted Gross Income (AGI) from all sources + 50% of Social Security benefits received + exclusions to AGI (i.e. foreign income previously excluded) + any tax-exempt interest income (i.e. Municipal Bond Interest) + tax-free fringe benefits.

As an example, John and Mary have the following income: $40,000 W2 income, $30,000 from Social Security, and $3,000 interest from Municipal Bonds. Therefore, their provisional income will be $40,000 + $15,000 (50% of $30,000) + $3,000 = $58,000.

After your provisional income is calculated you can use the following table to determine the percentage of Social Security that may be taxed.

 

The easy, less accurate method is to find your provisional income and then multiply your Social Security benefits by the percentage associated with your provisional income. For example, If John and Mary file jointly, their provisional income of $58,000 will put them into the 85% taxable Social Security benefit bucket. 85% multiplied by $30,000 Social Security = $25,500 of Social Security income being taxed at ordinary income rates.

The Harder, More Accurate Way

In the previous table, you will notice the words “Up to x% of SS is taxable”. We are going to explore why it says “up to” instead of just “x% of SS is taxable”.

1) Calculate your provisional income
2) Add the portion of provisional income that is taxable as 50% to the portion of provisional income that is taxable as 85%.
3) If step 2 results in a taxable amount more than 85% of Social Security benefits, do not use that number and instead limit your Social Security taxable amount to 85%.

Let’s run through a couple examples:

Example 1:
John and Mary have the following income: $40,000 W2 income, $30,000 from Social Security, and $3,000 interest from Municipal Bonds.


Step 1)
Provisional income will be $40,000 + $15,000 (50% of $30,000) + $3,000 = $58,000.


Step 2)
Portion taxable at 0% = $32,000 x 0% = 0
Portion taxable at 50% = ($44,000 – $32,000) x 50% = $6,000
Portion taxable at 85% = ($58,000 – $44,000) x 85% = $11,900
Total taxable Social Security = $6,000 + $11,900 = $17,900


Step 3)
Because $17,900 is less than 85% of their Social Security ($30,000 x 85% = $25,500), $17,900 is the Social Security amount that will be taxable. This means that 59.7% of their benefit is effectively taxed.

 

Example 2:
John and Mary have the following income: $50,000 W2 income, $30,000 from Social Security, and $3,000 interest from Municipal Bonds.


Step 1)
Provisional income will be $50,000 + $15,000 (50% of $30,000) + $3,000 = $68,000.


Step 2)
Portion taxable at 0% = $32,000 x 0% = 0
Portion taxable at 50% = ($44,000 – $32,000) x 50% = $6,000
Portion taxable at 85% = ($68,000 – $44,000) x 85% = $20,400
Total taxable Social Security = $6,000 + $20,400 = $26,400


Step 3)
Because $26,400 is more than 85% of their Social Security ($30,000 x 85% = $25,500), $25,500 is the Social Security amount that will be taxable. This means that 85% of their benefit is effectively taxed.

Important Notes:

– A child receiving social security dependent or survivor benefits do not count towards your taxable income. Supplemental Social Security income is not taxable.


– You can prepay your Social Security taxes by making quarterly payments, or by choosing to have federal taxes withheld from the benefits directly.


– This article reflects how federal taxes are calculated, not state taxes. The following states have more guidelines to follow when determining your taxable number: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, Rhode Island, North Dakota, Vermont, Utah, or West Virginia.