Primer on Taxation of Social Security Benefits

Considering that your Social Security benefits are actually derived from a tax you’ve already paid, it’s strange that your monthly benefit may also be taxed, isn’t it? But so it goes.

The taxation of your Social Security benefits depends upon the level of your Provisional Income (also referred to as Combined Income). Your Provisional Income is defined as your total income amount used for determining tax liability related to Social Security benefits. The formula below is used to determine your Provisional Income:

Provisional Income = Modified adjusted gross income + tax-exempt interest + 50% of Social Security benefits

The tricky part is determining the amount of your actual Social Security benefit that is taxable. The taxable portion of Social Security is the minimum of three amounts:

  1. 85% of Social Security benefits;
  2. 50% of benefits plus 85% of Provisional Income beyond the second threshold amount; or
  3. 50% of Provisional Income beyond the first threshold plus 35% of Provisional Income beyond the second threshold amount.

The first and second thresholds mentioned above are set amounts of $25,000 and $34,000 for singles. The threshold amounts for couples filing jointly are $32,000 and $44,000. Threshold amounts are not indexed for inflation. For more details, see “Taxation of Social Security Benefits“.

Social Security benefits may affect your marginal tax rates, but careful planning can reduce the impact. Embedded in our sophisticated model are the complex formulas for Provisional Income and the three tax formulas for taxation of Social Security benefits including the  appropriate threshold amounts. Let us take the guesswork out of your Social Security benefits and help you minimize your related taxes.

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