Taxation of Social Security benefits

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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%. Social security benefits are also taxable in some states (see Figure 1.)

The formula

The full rules are in IRS Publication 915.[1][footnotes 1] 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.[2]

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.)[3]

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.[4]

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.[5]

Examples

These examples are based on tax numbers for 2015. 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 $4,000) and take the standard deduction ($7,850 for a taxpayer over 65), so your first $11,850 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
11,850 0 11,850 0 10% 0 10%
15,000 0 15,000 3,150 10% 0.50 15%
19,050 2,025 21,075 9,225 15% 0.50 22.5%
24,000 4,500 28,500 16,650 15% 0.85 27.75%
35,243 14,057 49,300 37,450 25% 0.85 46.25%
38,706 17,000 55,706 43,856 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 $8,000) and take the standard deduction ($15,100 for a married couple over 65), so your first $23,100 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%
19,400 3,700 23,100 0 10% 0.50 15%
24,000 6,000 30,000 6,900 10% 0.85 18.5%
30,243 10,257 41,550 18,450 15% 0.85 27.75%
56,941 34,000 90,941 67,841 15% 0 15%
64,000 34,000 98,000 74,900 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 2015 tax brackets, the 46.25% rate only affects a couple with Social Security of $45,229. With that benefit, $6000 of Social Security would be taxable for other income of $21,385, and every additional $1 would make 85 cents taxable, up to a total income of $59,556, which would make the maximum $38,445 taxable. This gives an adjusted gross income of $98,001, and the last $1 is taxed in the 25% bracket.

State taxation

Figure 1.

While most states do not tax social security benefits (shaded blue in figure; along with green shaded states which do not impose income tax), six states tax benefits to the extent they are taxed at the federal level (shaded lavender), while eight states exempt social security benefits from taxation subject to limits (shaded yellow).

The states that tax benefits to the extent they are taxed at the federal level include:

The states that tax social security benefits subject to limits include:

  • Colorado: If a household meets certain age requirements qualifying retirement income can be excluded from income if it is taxable under federal income tax.[12]
  • Connecticut: Allows taxpayers to totally exempt social security from state income tax if income is less than $60,000 (joint filers).[13]
  • Iowa: In 2013 exempts a certain portion of benefits from income tax. In 2014 the exemption will increase to 100%. [14]
  • Kansas: Exempts social security benefits from state taxation if federal adjusted income is less than $75,000.[15]
  • Missouri: Allows taxpayers with adjusted gross income of less than $100,000 (joint filers) to deduct all social security benefits from income.[16]
  • Montana: Some social security benefits may be taxable (state advises filling out a worksheet); in general if total income is below $32,000 joint filers, benefits will not be subject to tax.[17]
  • New Mexico : Benefits are taxable, but a person can qualify for an exemption if he or she is 65 years of age or older.[18]
  • Utah: If a household meets certain age requirements qualifying retirement income can be offset by credit, which is phased out once income exceeds a certain level.[19]

Notes

  1. Calculation of taxable benefits is done in two steps. First, Worksheet A is used to determine if your benefits are taxable. If so, Worksheet 1 through 4 (select one based on filing method) is used to calculate the tax.

References

  1. IRS Publication 915 PDF or Online
  2. 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.
  3. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  4. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  5. IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits
  6. Taxes by State, Minnestota, retirementliving.com,
  7. Taxes by State, Nebraska, retirementliving.com,
  8. Taxes by State, North Dakota, retirementliving.com,
  9. Taxes by State, Rhode Island, retirementliving.com,
  10. Taxes by State, Vermont, retirementliving.com,
  11. Taxes by State, West Virginia, retirementliving.com,
  12. Taxes by State, Colorado, retirementliving.com,
  13. Taxes by State, Connecticut, retirementliving.com,
  14. Taxes by State, Iowa, retirementliving.com,
  15. Taxes by State, Kansas, retirementliving.com,
  16. Taxes by State, Missouri, retirementliving.com,
  17. Taxes by State, Montana, retirementliving.com,
  18. Taxes by State, New Mexico, retirementliving.com,
  19. Taxes by State, Utah, retirementliving.com,

External links