Figuring Out How Much You’ll Pay in Taxes on Your Social Security

Being an adult is a fun game, no? Your wages are taxed for Social Security, and when you claim Social Security, you’re taxed on the benefits. What a hoot.

So, let’s say you want to know how much you’re going to get taxed on those benefits. Not surprisingly, it depends. In the worst-case scenario, the government would tax 85% of your benefits. Remember: That doesn't mean you pay the government 85% of your benefits back in taxes. It means you might have to include 85% of them in your income that’s subject to your regular tax rates.

Hang on. There’s more math ahead.

WHAT’S YOUR INCOME?

To figure out how much of your benefits are taxed, you have to first figure out your other income. This includes items you might otherwise exclude for tax purposes, e.g., tax-exempt interest. If you file jointly, you have to also add in your spouse’s income. To that number, add half of the Social Security benefits you and your spouse received during the year. The number you come up with is your total income plus half of your benefits.

APPLY THESE RULES

Now for the fun part. It’s like an “if this, then this” board game. Kinda:

1. If your income plus half your benefits is less than $32,000 (or $25,000 for single taxpayers), none of your benefits are taxed.
2. If your income plus half your benefits exceeds $32,000 but is less than $44,000, you will be taxed on:
   1. Half of the excess over $32,000, or
   2. Half of the benefits, whichever is lower.

HERE’S AN EXAMPLE

Bunny and Dave have $20,000 in taxable dividends, $2,400 of tax-exempt interest, and combined Social Security benefits of $21,000. So, their income plus half their benefits is $32,900. They must include $450 of the benefits in gross income. If their combined Social Security benefits were $5,000, and their income plus half their benefits were $40,000, they would include $2,500 of the benefits in income. That’s because half of $40,000 − $32,000) equals $4,000, but half of the $5,000 of benefits is $2,500 is lower, so they’d use the lower number.

3. If your income plus half your benefits exceeds $44,000 (or $34,000 for single taxpayers), the calculations get a lot more complicated. Generally, however, if you fall into this category, 85% of your Social Security benefits will be taxed.

A WORD OF WARNING

If you aren't paying tax on your Social Security benefits now because your income is below the amounts listed above or you’re paying tax on only 50% of those benefits, an unplanned increase in your income can have a triple tax cost.

First, you'll have to pay tax on the additional income. Then, you'll also have to pay tax on (or on more of ) your Social Security benefits (since the higher your income, the more of your Social Security benefits are taxed.) Plus, you might get pushed into a higher tax bracket.

How could something like that happen? Well, maybe you receive a large distribution from a retirement plan, like an IRA, or have some capital gains.

THE IMPORTANCE OF PLANNING

If you do some careful planning, you might be able to avoid a stiff tax penalty. For example, you might be able to spread the additional income over more than one year or liquidate assets other than an IRA account.

Also, if you know your Social Security benefits will be taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.

If you have questions about taxes on your Social Security benefits, let us know.