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Financial Questions & Answers

Financial Questions & Answers

Question:

At what point does Social Security become classified as income and become taxable? -Larry

Answer:

We’ve gotten lots of questions on this topic in the last couple of weeks, so we’ll use your question to put it all out there. First, IRS Publication 915 lays it all out in detail. There’s actually a worksheet in the publication that you can use to determine whether any of your Social Security benefits are taxable. But here’s how it works.

First, take one-half of the total of Social Security benefits received throughout the year. The total benefit is reported to you on Form SSA-1099. To this number, add any other taxable pensions, wages, interest, dividends, capital gains and tax-exempt interest income. This gives you a total to compare to what the IRS calls a base amount. Your base amount is determined by your filing status. So, we’ll look at three different scenarios:

  1. Married, filing jointly: The base amount is $32,000. If the number calculated above is greater than $32,000, at least 50 percent of your Social Security will be taxable. If your income (including half your Social Security) exceeds $44,000, 85 percent of your Social Security will be taxable.
  2. Single, head of household, qualifying widower, or married filing separately and lived apart from your spouse the entire year: The base amount is $25,000. Again, if your income including half your Social Security exceeds $25,000, half your Social Security will be taxable. If you exceed $34,000, 85 percent of your Social Security benefits will be taxable.
  3. Married, filing separately and lived with your spouse at any time during the year: If this is your situation, 85 percent of your Social Security benefits will be taxable.

So there you have it! Hopefully, this clears up any confusion regarding the taxation of your Social Security benefits. One thing that’s interesting about the calculation is that unlike many thresholds in the tax code, the dollar amount of these thresholds have not changed since they became law back in 1983 (50 percent) and 1993 (85 percent). So, more and more folks are finding their Social Security to be a taxing situation…