Taxation of Social Security Benefits

financial planning for retirement Feb 11, 2020

By Glenn J. Downing, MBA, CFP®

This blog post is the second of a trilogy having to do with Social Security.  The first is about Social Security Benefits; the third is, Will Social Security will be There When I Retire?  

Oh yes. Many new Social Security retirees get a big surprise when they learn about the taxation of Social Security benefits. This started during the Clinton administration. That administration added a formula to the tax code to determine how much, if any, of your Social Security benefit is subject to tax. Previously Social Security benefits did not count as taxable income at all.

Provisional Income

The formula used to determine how much of your benefit is taxable is the provisional income formula. It boils down to this: add all of your income together – wages, business earnings, tax-free bond income (yes – non-taxable income is included in this formula), IRA distributions – everything – plus ½ of your Social Security benefit. If the result falls into the following ranges, then that portion of your Social Security income gets taxed along with everything else:

Married filing jointly
If provisional income is:

  • <$32,000, then no Social Security benefit gets taxed
  • $32,000 to $44,000, then 50% of Social Security gets taxed
  • >$44,000, then 85% of Social Security gets taxed

For single filers, the numbers are these:
If provisional income is:

  • <$25,000, then no Social Security benefit gets taxed
  • $25,000 to $34,000, then 50% of Social Security gets taxed
  • > $34,000, then 85% of Social Security gets taxed

For a married taxpayer filing jointly, does this mean that 85% of his Social Security will be taxed away? Fortunately, no! It means that up to 85% of the Social Security payments will be added in with all of the other taxable income. Here’s an example:

A married couple has this income:

  • $18,000 pension income
  • $6,000 IRA distributions
  • $12,000 municipal bond interest (non-taxable)
  • $24,000 Social Security income ($2,000/month)

Now apply the provisional income formula. The result is ($18K + $6K + $12K +$12K) = $48,000. $48,000 is more than $44,000 (from the table above); consequently, 85% of the Social Security benefit gets added to the other taxable income. Although the income above totals to $60,000, the taxable income is as follows:

  • $18,000 pension income
  • $6,000 IRA distributions
  • $20,400 Social Security income (85% of their benefit)

. . . for a taxable income of $44,400. This is $15,600 less than their gross income since the municipal bond income is tax-free. 85% of the Social Security income is taxed based on the provisional income formula. The tax on $44,400, assuming the standard deduction, is $1825 (2020).

There is actually a little more to this formula than I've specified here, but as the saying goes, this is close enough for government work.  

 Get in touch! 

The taxation of Social Security benefits is a surprise topic for a lot of people. For more information check out the first piece in this trilogy on Social Security Benefits. This is actually part II; part III is Will Social Security be There When I Retire?

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