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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 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.