Is Your Social Security Benefit Taxed?

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.

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.  What this boils down to is, essentially, 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:
  • Line 7, 8a, 8b, 9a, 10, 11, 12, 13, 14, 15b, 16b, 17, 18, 19 and 21, plus 50% of your Social Security benefit – these income lines are all added together.
  • Line 23, 24, 25, 26, 27, 28, 29, 30, 31 and 32 – these deduction lines are all added together
  • Subtract the deductions from the income items – if this number is zero or less, you don’t have to calculate any more, as 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

So 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 less 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

So you now know that the amount of Provisional Income is in excess of your Base Amount plus the Incremental amount, which is your Excess Provisional Income.  To finalize your calculation, 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
Hope those two examples cleared things up a bit.  If you are in one of the Single filing statuses, substitute your BA and Incremental BA where applicable.

Married Filing Separately, Having Lived With Your Spouse

If you fit the category with the 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.

About the author

Jim Blankenship, CFP®, EA

Jim Blankenship is the founder and principal of Blankenship Financial Planning, Ltd., a financial planning firm providing hourly, as-needed financial planning and advice. A financial services professional for over 25 years, Jim is a CFP professional and has earned the Enrolled Agent designation, a designation that qualifies him as enrolled to practice before the IRS. Jim is also a NAPFA-registered financial advisor, which designates him as a Fee-Only Financial Advisor.

An IRA Owner's Manual
A Social Security Owner's Manual

4 Comments

Leave a comment
  • Thanks, Charlie.

    I think I deserve credit for not taking Carol to task over this “tongue in check” that she refers to… what the heck is that?? 😉

    Take care,

    jb

  • Good Grief Carl needs a life. I enjoy your articles. Vey helpful I need to look and see if you have a part on what will actually reduce my si benefits.
    Thanks
    Best Regards,
    Charlie

  • Hello, Carol –

    Honestly, I never dreamed that anyone would take offense to my colloquialisms. It’s my way of showing that there’s a human being behind these articles, not the IRS or some gigantic corporation.

    I hope the silliness didn’t detract from the meat of the article for your needs.

    jb

  • Your information was very helpful. Your ‘play-by-play’ of calculating the needed amount was quite well done. Thank you for sharing this information.

    I thought the first time you used ‘figger’ instead of ‘figure’ that you were using it ‘tongue in cheek’. The second time when you used ‘figgering’ instead of ‘figuring’, I wondered if that, too, was ‘tongue in check’ or, in fact, an inadvertent error.

    You’ve done such a good job of explaning this issue. It’s unfortunate to have the language error running through your work.

Leave a Reply

Your email address will not be published.

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <s> <strike> <strong>

Copyright 2014 FiGuide.com   About Us   Contact Us   Our Advisors       Login