Taxation
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      How Are Social Security Benefit Taxes Calculated? 

      A Formula for Determining Taxable Social Security

      Many people and financial planning software programs assume that singles with over $34,000 of income or married couples with over $44,000 of income will have 85% of their Social Security benefit taxed, but that isn't always the case. You can use the worksheet in IRS Publication 915, fill out a 1040, or use this formula to calculate the taxable portion of Social Security benefits.

      Step 1: Determine Provisional Income  (1/2 of a Social Security benefit, and all other taxable income including dividends, realized interest, realized capital gains, plus non-taxable interest earnings, such as from municipal bonds.)

      Step 2: Subtract the first threshold and multiply by .5.

      Step 3: Subtract the second threshold and multiply by .35.

      Step 4: Add them up.

      Step 5: Calculate and apply the maximum. 

      Example

      These clients are married, filing jointly, and have $75,000 of total income. None of it is “tax-free” (Roth withdrawals or return of principal). The IRA withdrawals alone are well over the second threshold. 

      Step 1: 
      Determine Provisional Income 

      $30,000 in Social Security Benefits (1/2 is $15,000) 
      +$45,000 in IRA withdrawals 

      =$60,000 of “Provisional Income” 

      Step 2: 
      Subtract the first threshold and multiply by .5.

      $60,000 of Provisional Income 
      -$32,000 (First Threshold for married) 

      =$28,000 above the first threshold 
      x.5 
      =$14,000 of taxable benefits 

      Step 3: 
      Subtract the second threshold and multiply by .35.

      $60,000 of Provisional Income 
      -$44,000 (Second Threshold for married) 

      =$16,000 
      x.35 
      =$5,600 of taxable benefits 

      Step 4: 
      Add 

      $14,000 
      +$5,600 

      =$19,600 

      Step 5: 
      Calculate and apply the maximum. 

      .85 * $30,000 (Total Social Benefits) 
      =$25,500 
       
      If step 4 is less than the maximum, step 4 is the taxable amount. If step 4 is greater than the maximum, then step 5 is the taxable amount. 

       

      At first glance, many advisors would assume 85% of the clients' benefits would be taxable. The exercise above, however, shows that only 65.33% of the clients' Social Security benefits will be taxable as ordinary income. 

      In short, Social Security carries a substantial tax advantage over other forms of income, so delaying benefits in order to build a larger Social Security benefit has a greater positive tax impact than most people realize.