Taxation of Social Security benefits
The amount of Social Security income which is taxable depends on your taxable income. Most high-income retirees will have 85% of Social Security benefits taxable. For lower-income retirees, less than 85% will be taxable, but many retirees in a 15% tax bracket will face a marginal tax rate much higher than 15%.
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The formula
The full rules are in IRS Publication 915. This simplification covers most cases; there are special rules if you contribute to a Traditional IRA, receive retroactive payments for prior years, or file forms to exempt other income from taxation. [1]
The relevant income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50% of your Social Security benefits. (Historically, the 50% represents the fact that half of your Social Security contributions were made by your employer and thus not taxed.) [2]
There are two relevant base amounts; unlike most income limits in the tax code, they are not adjusted for inflation. The lower base is $25,000 if you are single, $32,000 if married filing jointly. The upper base is $34,000 if you are single, $44,000 if married filing jointly.[3]
If your relevant income is below the lower base, none of your benefits are taxable. For every $1 of relevant income between the lower and upper bases, 50 cents of your Social Security benefits become taxable, up to 50% of your total benefits. For every $1 of relevant income above the upper bases, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85% of your benefits.[4]
Examples
These examples are based on tax numbers for 2013. They illustrate how tax brackets and Social Security taxation interact, creating a 27.75% marginal tax rate for most taxpayers in the 15% tax bracket, and a 46.25% marginal tax rate for some single taxpayers but only married taxpayers with very high Social Security benefits at the bottom of the 25% bracket.
Single taxpayers:
If you are single and receive $20,000 in Social Security benefits:
- None of your benefits are taxable if your other income is less than $15,000.
- For every dollar between $15,000 and $24,000, an additional 50 cents becomes taxable.
- For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $38,706, which makes the maximum $17,000 taxable.
The table below assumes that you have no dependents (exemption of $3,900) and take the standard deduction ($7,600 for a taxpayer over 65), so your first $11,500 of income is not taxable.
| Non-SS Income | Taxable SS | Adjusted gross income | Taxable income | Tax bracket | Additional SS taxed for each $1 income | Marginal tax rate |
|---|---|---|---|---|---|---|
| 11,500 | 0 | 11,500 | 0 | 10% | 0 | 10% |
| 15,000 | 0 | 15,000 | 3,500 | 10% | 0.50 | 15% |
| 18,583 | 1,817 | 20,450 | 8,950 | 15% | 0.50 | 22.5% |
| 24,000 | 4,500 | 28,500 | 17,000 | 15% | 0.85 | 27.75% |
| 34,405 | 13,345 | 47,750 | 36,250 | 25% | 0.85 | 46.25% |
| 38,706 | 17,000 | 55,706 | 44,206 | 25% | 0 | 25% |
Married taxpayers:
If you are a married couple and receive $40,000 in Social Security benefits:
- None of your benefits are taxable if your other income is less than $12,000.
- For every dollar between $12,000 and $24,000, an additional 50 cents becomes taxable.
- For every dollar over $24,000, an additional 85 cents becomes taxable, up to a total other income of $56,941, which makes the maximum $34,000 taxable.
The table below assumes that you have no dependents (exemption of $7,800) and take the standard deduction ($14,600 for a married couple over 65), so your first $22,400 of income is not taxable.
| Non-SS Income | Taxable SS | Adjusted gross income | Taxable income | Tax bracket | Additional SS taxed for each $1 income | Marginal tax rate |
|---|---|---|---|---|---|---|
| 12,000 | 0 | 12,000 | 0 | 0% | 0.50 | 0% |
| 18,933 | 3,467 | 22,400 | 0 | 10% | 0.50 | 15% |
| 24,000 | 6,000 | 30,000 | 7,600 | 10% | 0.85 | 18.5% |
| 29,568 | 10,732 | 40,300 | 17,900 | 15% | 0.85 | 27.75% |
| 56,941 | 34,000 | 90,941 | 68,541 | 15% | 0 | 15% |
| 60,900 | 34,000 | 94,900 | 72,500 | 25% | 0 | 25% |
There is no 46.25% rate in this table because the example couple reaches the maximum taxable benefit amount before reaching the 25% tax bracket. With 2013 tax brackets, the 46.25% rate only affects a couple with Social Security of at least $42,933. At that rate, $6000 of Social Security would be taxable for other income of $22,534, and every additional $1 would make 85 cents taxable, up to a total income of $58,408, which would make the maximum $36,493 taxable. This gives an adjusted gross income of $94,901 and the last $1 is in the 25% tax bracket.
References
- ↑ Bogleheads' Guide to Retirement Planning, Chapter 11; this is the main reference for the formulas above, as it is much easier to follow than the IRS guide.
- ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
- ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
- ↑ IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
External links
- IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
- Innovative Strategies to Help Maximize Social Security Benefits James Mahaney, Vice President, Strategic Initiatives, Prudential
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