Social Security Tax: Step-By-Step Guide

Finding out that your social security benefits are taxable catches a lot of people by surprise.  After all, this is a benefit paid by tax that was collected from you.  Now it’s taxed again?  Yes.

According to the Social Security Administration 52% of families receiving social security benefits paid income tax on those benefits in 2015. So there’s a good chance that some of your benefits will be taxable.  Here’s how you can figure it out two steps.


Transcript Below

This is Devin Carroll with socialsecurityintelligence.com.  You know social security benefits at first were exempt from taxes.  Back in 1983 they became partially taxable and then in 1993 a second income threshold was added that increased the share of benefits subject to tax. SO determining how much of your benefits are taxable and how other sources of income will affect this taxation is foundational in crafting a retirement income plan.  In this video I want to give you the step-by-step guide in helping you figure out how social security benefits are taxed.

But first, I’m not part of the Social Security Administration or any other government entity.  Also I’m not here to provide you any specific tax, legal, or financial advice.  The information in this presentation should not be construed as such.  I encourage you to seek out your own advisors in all of these areas.

Finding out that your social security benefits are taxable catches a lot of people by surprise.  After all, this is a benefit paid by tax that was collected from you.  Now it’s taxed again?  Yes, according to the Social Security Administration 52% of families receiving social security benefits paid income tax on those benefits in 2015 so there’s a good chance that some of your benefits will be taxable.  Here’s how you can figure it out two steps.

Step one, you need to determine that your provisional income is.  We’ll cover the definition of that in just a moment.

Step two, you take that provisional income and you apply it to tax grid.  Now don’t worry because we’re going to dive into the details of each of these and then look at an example that should tie it all together for you.

What Is Provisional Income?

What is provisional income?  Well, Investopedia defines provisional income as the level of income that is used to determine whether a taxpayer is liable for tax on his or her own social security benefits and by how much.  If your social security provisional income is low, you may not owe any taxes on your social security benefits but if your provisional income is high you could be faced with having up to 85% of your social security benefits taxed as income so what falls into the category of provisional income?  Well, nearly everything.  First adjusted gross income.  Then you have your tax-exempt income and then one-half of your social security benefit and then you have other income so there are a lot of other things that could fall into that but you can summarize it by saying that your provisional income is equal to everything plus one-half of your social security benefits.  Now once you have your numbers you simply need to run it through the grid.

How Social Security is Taxed

Now the point of this grid is to determine what percentage of your social security benefits are taxable and the amount of tax that you pay is progressive.  It is not a flat rate based on your income levels.  Here are the current numbers.  If you’re single between 0 and 25,000, married filing jointly between 0 and 32,000.  If your provisional income falls between these bands then none of your social security benefits are taxable.  The next band is for single people between 25,000 and 34,000 or married filing jointly between 32,000 and 44,000 and then 50% of the amount in that band is added to your taxable income.  The next band is the highest band and that is single people above 34,000, married filing jointly about 44,000, 85% of the amount over those amounts in provisional income will be added to your taxable social security so let’s go through an example to see exactly how this would play out in the real world.  Let’s take this couple who have $32,000 in IRA distributions, $36,000 in social security, and then say they have $12,000 from a rental property or some type of other income so let’s calculate their provisional income with that information that we have.  First we know that they have a $32,000 IRA distribution, they have other income of 12,000, and remember only half of their social security benefit counts so that gives them a provisional income of $62,000 so let’s run this through the table with the provisional income of 62,000 and with the numbers that are married filing jointly and let’s see exactly how much they would have in taxable social security income but first let’s just go back through the three bands of social security income taxability for a couple who is married filing jointly.  Remember for provisional income that falls between 0 and 32,000 none of your benefits are taxable, for provisional income between 32,000 and 44,000 half of that amount is added to your taxable social security, for the amount over 44,000 it’s 85% added to your taxable social security so for this couple we know that the first 32,000 doesn’t add anything to the taxable social security; for the amount between 32,000 and 44,000, which is $12,000, half of that is added to their taxable social security income and then they have $18,000 above the 44,000 band and 85% of that is added which gives them a total amount of taxable social security income of $21,300.  As a percentage that comes in to 59% of their social security benefit that is taxable so that’s just a quick view of social security taxation.

Be sure and check out all of the videos in my channel.  We have videos on social security basics, we have some that cover the earnings limitation, some stuff that is fundamental in calculating what you can expect from social security.  Also if you want to stay up to date stay connected with me on Twitter, you can find me at devinacarroll and Facebook I’m at Devin Anthony Carroll.  Find me on my blog and go ahead and subscribe for the updates for that.  Socialsecurityintelligence.com.  Also beginning January 1, 2017, I’m launching a podcast, Big Picture Retirement, and you can find more information on that at bigpictureretirement.net.  Thanks so much for watching.  Have a great day.