How Much Of Your Social Security Benefit Is Taxable?

4th in a series

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For the past 40 years or more you have paid into the Social Security system with the promise that someday when you retire, you will receive a guaranteed monthly income for the rest of your life. Along the way, your employer has kicked in a matching contribution equal to 100% of your contribution.

At the end of your working life there should be a giant pile of cash with your name on it. And there is (figuratively speaking anyway). But it comes with a giant string attached.

In this case, the catch is that up to 85% of your monthly benefit is considered taxable income once it’s paid out to you. What’s more, depending on the state you live in, you may owe state income tax on those benefits as well. (Bad news fellow Minnesotans. We live in one of those states).

The following post will explain how much of your benefit is taxable and what, if anything, you can do about it.

Calculating the Tax

Social Security benefits are taxable for most people who receive them. To determine how much of your benefits are taxable, you will need to calculate your “provisional income” (also known as combined income), which is a combination of taxable income from wages, pensions, interest, dividends, etc., tax-exempt income from municipal bonds, and ½ of your Social Security benefits.

Provisional income is the number that the IRS uses to determine if your benefits are taxable.

For example, if you are single and your provisional income is less than or equal to $25,000 your Social Security benefits would not be taxable. However, if your income falls between $25,000 and $34,000, 50% of your benefits are taxable. If your provisional income exceeds $34,000, then 85% of your Social Security benefit would be taxable.

For married couples filing jointly, the base amount is $32,000. So, if you have provisional income of $32,000 or less, your Social Security income is not taxable. Make between $32,001 and $44,000, and 50% of your benefits are taxable. And if your income exceeds $44,000, then 85% of your benefits are taxable.

For a detailed explanation of how Social Security benefits are taxed and a worksheet to help you calculate your provisional income, check out IRS publication 915 (page 3) or download it here.

Next week, in the final segment on this series about Social Security, I will share 7 strategies strategies to help you to get more retirement income from your Social Security benefits.

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