Are Your Social Security Benefits Taxable?

 

Taxable Social Security Benefits

Will you Pay Taxes on Your Social Security Benefits?

According to AARP (www.aarp.com) in 2012 Social Security claimants paid a total of $45.9 billion in income taxes on their benefits. The Social Security Trust Funds, from which benefits are paid, received $27. 3 billion and the Medicare Hospital Insurance Fund (HI) received $18.6 billion. This blog provides an easy way to determine if your Social Security benefits are taxable.

About 15 million Social Security recipients pay Federal taxes on their benefits. Most states do not tax Social Security benefits. Specifically, 27 states and DC do not tax Social Security benefits. To see if your state taxes your Social Security payout go to the Tax Foundation at www.taxfoundation.org.

Generally, if your only source of income is your Social Security benefits  you won’t have to pay taxes. A quick way to determine if you have to pay taxes on your benefits is to determine your Modified Adjusted Gross Income.

What’s Included in Your Modified Adjusted Gross Income (MAGI)

According to Turbo Tax (www.turbotax.com) to calculate your Modified Adjusted Gross Income (MAGI), take your adjusted gross income (AGI) and add back certain deductions. Many of these deductions are rare, so it’s possible your AGI and MAGI will be the same. To sum it up, your MAGI is your AGI with the addition of the following deductions, if applicable:

  • Student loan interest
  • One-half of self-employment tax
  • Qualified tuition expenses
  • Tuition and fees deduction
  • Passive loss or passive income
  • IRA contributions, taxable social security payments
  • The exclusion for income from U.S. savings bonds
  • The exclusion under 137 for adoption expenses
  • Rental losses
  • Any overall loss from a publicly traded partnership

Determining How Much You Will Be Taxed

A simplified overview of the MAGI calculation is: AGI + tax-free interest (such as, municipal bonds, U.S. savings bonds, etc.) + 50 percent of your Social Security benefits + any tax free benefits and exclusions (such as, foreign income).  If this amount exceeds certain break points you will have to pay taxes.

Taxable MAGI for Singles

For singles with MAGIs of less than $25,000 your benefits are not taxable, (2) for singles between $25,000 and $34,000, you may have to pay income tax on up to 50 percent of your benefits, and (3) singles with MAGI’s of $34,000 and greater, up to 85 percent of your benefits may be taxable.

Taxable MAGI for You and Your Spouse Filing a Joint Return

For couples filing a joint return with a combined MAGI  below $32,000, your benefits are not taxable, (2) if you and your spouse file a joint return with a combined MAGI between $32,000 and $44,000 up to 50 percent of your benefits may be taxable, and (3) if you and your spouse file a joint return with a combined MAGI that is greater than $44,000 up to 85 percent of your benefits may be taxable

Note: If you receive a $255 lump-sum death benefit it is not taxable and you should not include it on your tax return.

Example a Social Security Tax Calculation

Kiplinger (www.kiplinger.com) provides this example of how the taxation of Social Security benefits works: Let’s say that your Adjusted Gross Income (AGI) is $30,000 and you have $4,000 in tax-free interest from municipal bonds and $5,000 in Social Security benefits. Adding your AGI ($30,000), you tax-exempt interest ($4,000) and half of your Social Security benefits ($2,500). Your total MAGI is $36,500. You are now $4,500 over the $32,000 limit for joint returns. Since half of that amount ($2,250) is less than half of your benefits ($2,500), the smaller amount becomes taxable income. If you are in the 15 percent tax bracket, the $2,250 will cost $337.50 in extra Federal income tax ($2,250 X .15 = $337.50).

How Will You Know the  Exact Amount of Your Social Security Benefits?

Each January you will receive a Social Security Benefit Statement(Form SSA-1099) showing the amount of benefits you received in the previous year. You can use this SSA-1099 when you complete your Federal income tax return to find out if your benefits are subject to tax.

Your Options if Your Social Security Benefits are Taxable

If you do have to pay taxes on your Social Security benefits, you can make quarterly estimated tax payments to the IRS or choose to have Federal taxes withheld from your benefits. For more information about taxation of benefits, read page 14 of the Social Security Administration’s Retirement Benefits booklet or refer to the Internal Revenue Services’ IRS Publication 915.

 

About ksindell

Kathleen Sindell, Ph.D. is the author of numerous academic, popular, and professional finance articles, Web sites, proposals, and books. This includes the bestselling reference book, "Investing Online for Dummies, Eds 1-5" (listed for two consecutive years on the Wall Street Journal's Bestselling Business Book List). Her most recent book "Social Security: Maximize your Benefits" has been listed in Amazon's Top 100 Bestselling Retirement Planning Books. It is important to note that "Social Security: Maximize Your Benefits, 2nd Edition" was just released. Sindell has an in-depth understanding of the financial services industry and has held Series 7, 63, and 65 licenses. Dr. Sindell is regularly tapped as a financial services expert on ABC World News, The Nightly Business Report, and at popular online and print outlets. Kathleen Sindell, Ph.D. is a member of the Board of Directors for the Financial Planning Association, National Capital Area (FPA NCA), is on the Editorial Advisory Panel of the Journal of Financial Planning, and is Co-Chair of the Metro Washington Financial Planning Day. Sindell is a Course Chair II, CFP Program Academic Officer, and adjunct full-professor at the University of Maryland, UMUC, School of Undergraduate Studies. Contact Information: ksindell@kathleensindell.com or 703-299-1700
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