Is My Social Security Taxable?
Millions of Americans depend on their social security benefits month after month. These monthly payments are what supplement the retirement income of many Americans. Social security is a prominent topic in today’s financial landscape, but one topic regarding the benefits seems to be somewhat under-discussed as most people don’t even realize that social security benefits could be taxable.
The truth is, up to 85% of your social security benefits could be taxable but that depends on your provisional income, which is calculated somewhat differently from your taxable income.
Income Requirements for Taxed Social Security
Income requirements will vary based on the status of your tax filing. If you are single, head of household, or a qualifying widower with a total income of $25,000 or less, then your benefits will not be subject to the tax. When you jump up to the next income bracket of $25,000 to $34,000, then half of your benefits will be taxed. Anything above this bracket will result in 85 percent of your social security being subject to the tax.
For those who are married filing jointly and earn between $32,000 and $44,000, half of your benefits will be subject to the tax. If you earn over $44,000, then 85 percent of your benefits will be subject to the tax.
Calculating Total Income
There may be good news on the horizon for you. Total income is calculated somewhat differently, and this can either help or hurt you depending on your unique financial situation. Here is the simple formula to calculate your provisional income for social security purposes only:
Provisional Income = Adjusted Gross Income + Nontaxable Interest + ½ Social Security Benefits
Let’s take a closer look at how this formula looks in action:
A married couple files their taxes jointly at retirement and has $12,000 in income from different retirement plans. They also have $24,000 per year from social security benefits and $3,000 of non-taxable interest income such as municipal bonds. Their income for social security purposes would look something like this:
Provisional Income = $12,000 + $3,000 + $12,000
In other words, their provisional income comes to $27,000. As a result, their income is less than the $32,000 threshold where their benefits would be subjected to the tax. Their benefits will be tax-free even though their true income is higher than the provisional income listed here.
What Counts as Income?
Not all incoming money is factored into the above equation to determine your provisional income for the purposes of taxing your social security. Income that you receive from a part-time or full-time job does count, as well as dividends, interest (even on municipal bonds), or income from rental properties. It also includes any other type of distribution you take from a traditional 401(k) or traditional IRA given that these accounts were both funded with pre-tax money.
On the other hand, distributions from Roth IRAs or Roth 401(k)s are not counted as income.
Calculating Social Security Tax
While no one really wants to pay taxes on their social security income, it is beneficial to know what you can expect to pay. Using this formula to determine your provisional income can give you a heads up on whether your social security is taxable. As always, be sure to consult a professional financial planner if you have any further questions on what you can expect from your social security benefits.