Are Social Security Benefits Taxable?

Untitled designWhether your Social Security benefits are taxable (and, if so, how much of them are) depends on a number of issues. The following facts will help you understand the tax of your Social Security benefits.

Social Security benefits, in this case, refers to the gross amount of benefits you receive, meaning the amount before reduction due to payments withheld for Medicare premiums. The tax treatment of Social Security benefits is the same whether the benefits are paid due to disability, retirement or reaching the eligibility age. Supplemental Security Income (SSI) benefits are not taxable under any circumstances. Therefore they are not included in the calculation.

How Much of Social Security Benefits Are Taxable

How much of your Social Security benefits are taxable depends on your total income and marital status. Of course, that is if any of the social security benefit is taxable.

  • If Social Security is your only source of income, it is generally not taxable.
  • If you have other significant income, as much as 85% of your Social Security benefits can be taxable.
  • If you are married and filing separately, and you lived with your spouse at any time during the year, 85% of your Social Security benefits are taxable regardless of your income. This is to prevent married taxpayers who live together from filing separately, thereby reducing the income on each return. Thus reducing the amount of Social Security income subject to tax.

How do I know if my Social Security Benefit is taxable?

The following quick calculation can be done to determine if some of your benefits are taxable:

Step 1. Add one-half of the total Social Security benefits you received to the total of your other income. Include any tax-exempt interest and other exclusions from income.

Step 2. Compare this total to the base amount used for your filing status. If the total is more than the base amount, some of your benefits may be taxable.

What Are the Base Amounts?

  • $32,000 for married couples filing jointly;
  • $25,000 for single persons, heads of household, qualifying widows/widowers with dependent children, and married individuals filing separately who did not live with their spouses at any time during the year; and
  • $0 for married persons filing separately who lived together during the year.

Taxpayers can defer their “other” income from one year to another. They may be able to plan their income so as to eliminate or minimize the tax on their Social Security benefits from one year to the next. An example of this is taking Individual Retirement Account (IRA) distributions. However, the required minimum distribution rules for IRAs and other retirement plans must be taken into account.

Those may be missing an opportunity for some tax-free withdrawals are:

  • Individuals who have substantial IRAs
  • AND who are not required to make withdrawals OR are making their post age 70.5 required minimum distributions
  • Without withdrawing enough to reach the Social Security taxable threshold.

Everyone’s circumstances are different. However, what works for one may not work for another.

Need More Information on how Social Security Benefits Affect Your Tax Return?

If you have questions about how social security benefits affect your tax returns, or if you wish to do some tax planning, call Alex Franch, BS EA at 781.849.7200 for additional information. He understands the details involved with the Earned Income Credit and the IRS requirements. Worthtax has locations in Quincy, Weymouth and Dedham.

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