Each tax season we are asked the same social security benefits questions. Are my Social Security benefits subject to tax? How much of my Social Security is taxable? The answer is often the same and not much help – it depends.
In 1983 Congress first approved Social Security benefits tax. At the time, there was concern that the Trust Fund would run out of money. Up to one-half of a retiree’s Social Security benefits would be taxable, but only if his/her income exceeded a certain threshold. It was estimated that only 10% of recipients would be affected.
Then in 1993, Congress added a second threshold and increased to 85% the amount of benefits that could be taxed. These threshold amounts have never been adjusted for inflation.
Let me explain how it works. First let’s calculate your Provisional income. Provisional income is the taxpayer’s adjusted gross income, (line 37 on Form 1040) plus any tax-exempt interest, plus ½ of your Social Security benefits.
For a single person, your benefits will not be taxed unless your Provisional income exceeds $25,000. If you are married and file a joint return, the threshold is $32,000. If you are married filing a separate return and you lived with your spouse, your threshold is zero, and your benefits may be taxable from the first dollar.
Once we determine whether any of your benefits are taxable, your next question may be how much of the benefits will be subject to taxes?
If your Provisional income is over the threshold mentioned previously, then up to 50% of your benefits could be taxed. Married filing jointly with Provisional income that exceeds $44,000, or single filers with Provisional income exceeding $34,000 could have 85% of their Social Security benefits subject to Federal Income Tax. The threshold for married people filing separate returns is still zero.
Please note that these rules also apply to Social Security disability and survivor benefits. Many people are under the mistaken impression that these benefits are not subject to the rules. Also, bear in mind that investing in those tax-exempt bonds in your later years will not help you dodge taxes on your Social Security.
Now, the next time Granny or Uncle Joe asks if you think they need to file a tax return because “all I have is my Social Security and small pension”, you can respond with a definitive “It depends!”
If you would like help navigating these tax rules, please contact us.