Social Security: Taxation on Benefits

Ken Weingarten |

One would think that after years of contributing into Social Security, the benefits received would be tax-free. While to a certain extent they are, determining the taxability of Social Security benefits is dependent on the answers to a few questions. Below we go over what these questions are with an example of a situation where benefits may be taxed.

Is your benefit taxable?

The first hurdle to cross in order to determine whether one’s benefits will be taxed is calculating what the IRS calls “Provisional Income”. If provisional income is above $25,000 for a single filer or $32,000 for a married couple filing jointly, Social Security benefits will be taxed. If total income falls below these thresholds, benefits will not be taxed.

What type of income is counted to determine if your benefit is taxable?

In order to determine this provisional income figure, three items need to be added up for this calculation:

  1. Adjusted Gross Income – Pensions, Wages, Interest, Ordinary Dividends, and Capital Gain Distributions
  2. One-half of your Social Security benefits
  3. Any tax-exempt interest income (Normally, this is not taxed, but this is added for the sake of the calculation)

What amount of the benefit will be taxed?

Once the provisional income figure is calculated, we can then figure out how much, if any, of Social Security benefits will be taxed. Below is a chart illustrating what amount of benefits will be taxed by:


Bringing It All Together

As an example, let us assume a married couple has $40,000 in income, $10,000 in tax-exempt income, and is receiving $50,000 in Social Security benefits. For provisional income calculation purposes, this couple is deemed to have $75,000 ($40,000 + $10,000 + $25,000 (one-half of the total benefits received)). Because this is over the $44,000 threshold. 85%, or $63,750 of the $75,000 of benefits will be taxed.

State Taxes on Benefits

Everything mentioned above is in relation to the Federal level of taxation. Depending on where one lives, a state income tax on social security benefits may also apply. Below is a chart illustrating which states do and which states don’t:

Ultimately, the calculation can now be calculated fairly easy thanks to tax preparation softwares and calculators available online. One should still be mindful of the fact that Social Security benefits can be taxed and plan accordingly. It is recommended that one speak to a tax advisor for more details on one’s situation.

Weingarten Associates is an independent, fee-only Registered Investment Advisor in Lawrenceville, New Jersey serving Princeton, NJ as well as the Greater Mercer County/Bucks County region. We make a difference in the lives of our clients by providing them with exceptional financial planning, investment management, and tax advice.