Is My Social Security Benefit Taxable?

Taxation of Social Security has been a topic of discussion in the news in recent months. When the program was first introduced in the 1930’s, there was no federal income tax on Social Security Benefits. It wasn’t until the 1980’s and 1990’s that benefits became taxable. It leads to the question: Is my Social Security Benefit Taxable?

The answer is (as it always seems), it depends. It’s important to discover how and why.

Determining the Taxable Amount of Social Security Benefit

You need to understand three criteria to determine how Social Security benefits are taxed.

Provisional Income

Provisional Income is a calculation used by the IRS to determine the taxability of your Social Security benefits.

Filing Status & Thresholds

For single filers, the thresholds are as follows:

• Provisional Income < $25,000 = 0% of Social Security Benefits are taxable.
• $25,000 < Provisional Income < $34,000 = 50% of Social Security Benefits are taxable.
• $34,000 < Provisional Income = 85% of Social Security Benefits are taxable.

Couples Married Filing Jointly:

• Provisional Income < $32,000 = 0% of Social Security Benefits are taxable.
• $32,000 < Provisional Income < $44,000 = 50% of Social Security Benefits are taxable.
• $44,000 < Provisional Income = 85% of Social Security Benefits are taxable.

For Couples Married Filing Separately:

• If living together in the same household during the tax year, 85% of Social Security Benefits are included in taxable income.
• If not living together in the same household, each spouse is treated as a single filer. 

These thresholds have not been indexed for inflation in recent years, so it’s notable that as Social Security Cost of Living Adjustments have been applied, these thresholds have not been indexed.

What’s also important to note is that these thresholds are not “all or nothing,” but rather will be taxed based on how much a taxpayer would exceed the thresholds. In other words, these taxes are progressive, much like the marginal income tax brackets are.

Some examples should help explain this concept. 

Examples of Social Security Benefit Taxation

Let’s take a look at a couple different examples of how provisional income would be applied at each threshold.

No Tax on Benefits

Lauren Paxson is a single filer. She has a Roth IRA & a Social Security benefit as her sole income sources. Her breakdown is as follows: 

• $15,000/year from her Roth IRA (qualified distribution)
• $20,000/year from her Social Security
• $0/year of tax-exempt interest

None of Lauren’s Social Security benefit would be included in her taxable income in this scenario.

The Roth IRA distribution is considered tax free and not included in her Adjusted Gross Income. Half of the Social Security would be calculated, giving her a provisional income of $10,000 in this example.

Since she’s under the $25,000 threshold as a single filer, no portion of the benefit is included in taxable income. 

50% Threshold Example

When we tweak Lauren’s example a bit from the previous 0% taxable benefit example, we can see how she’d have 50% of her Social Security benefit included in her taxable income. Here’s a new breakdown:

• $20,000/year from her Traditional IRA
• $20,000/year from her Social Security
• $0/year of tax-exempt interest

This scenario places Lauren in the 50% threshold, but to be clear, it doesn’t mean 50% of her Social Security is necessarily included in taxable income.

To calculate:

We first need to calculate her provisional income. Half of the Social Security benefit ($10,000) plus her AGI ($20,000) equals $30,000 of provisional income.

From here, to determine how much of her benefits would be taxable, we need to again remember the thresholds.

For single filers, the first threshold is $25,000, so you subtract the first threshold from your provisional income to determine what portion of your Social Security is included in taxable income.

• $30,000 (provisional income) – $25,000 (50% threshold) = $5,000.
• $5,000 * .5 = $2,500 total taxable benefit.
• $2,500/$20,000 (total Social Security Benefit) = 12.5% of Social Security Benefits are included in taxable income. 

It’s important to distinguish that although you’ve passed the 50% threshold, it doesn’t necessarily mean 50% of all benefits are included in taxable income.

85% of Benefits Taxed

If Lauren would increase IRA withdrawals, we’ll see how she can cross into the 85% threshold:

• $40,000/year from her Traditional IRA
• $20,000/year from her Social Security
• $0/year of tax-exempt interest

To start, we’d again want to calculate provisional income. We take her AGI of $40,000 and add it to half her SS Benefit ($10,000) giving us a provisional income of $50,000.

Let’s use the calculation to determine how much of the Social Security benefit is included in taxable income:

• First Threshold:
  • $50,000 (Provisional Income) – $25,000-$34,000 (Threshold 1) = $9,000
    • $9,000 * .5 = $4,500
• Second Threshold:
  • $50,000 (Provisional Income) – $34,000 (Threshold 2) = $16,000
    • $16,000 *.85 = $13,600

We add these two figures together, and we find that $18,100 is the total amount. But since this is over the 85% threshold, we can say that 85% of the benefit is included in the taxable income, or $17,000, not the $18,100.

Simply put, as your AGI from other sources outside of your Social Security benefit increases, you’re more likely to include 85% of your Social Security benefit in your taxable income.

Additional Considerations of Social Security Benefit Taxation

To this point, we’ve focused on how the IRS considers your Social Security benefits and would subject them to federal taxation. But we’ve not talked about how your state considers taxing these benefits. Part of this reason is that the majority of states do not tax Social Security benefits directly.

As of this writing, there are 9 states that do tax Social Security Benefits, however. Those include:

• Colorado
• Connecticut
• Kansas
• Minnesota
• Montana
• New Mexico
• Rhode Island
• Utah
• Vermont

Worth noting (and you’ll find this in the above linked article), is that each state has their own rules on how they tax these benefits.

It’s worth researching if you live in one of those states, but understand that state tax law is changing constantly, so continue to follow your state’s policy.

Another important factor to consider is if your tax filing status changes. For example, if your spouse passes away or if you divorce or remarry, you are likely to notice your tax filing status change, which would have an impact on both your AGI and your provisional income. 

Additionally, Congress hasn’t updated these thresholds since 1993.

While inflation has certainly increased in the last 30+ years (as have Cost of Living Adjustments within your Social Security benefits), the thresholds have remained static.

Assuming no further changes to these thresholds, it will become increasingly more difficult to stay below these thresholds.

Strategies to Minimize Taxation

Not everyone needs to be hyper-alert to this level of taxation.

If you have a sizable pre-tax retirement balance, you may be well beyond the 85% threshold, which may make this type of planning a moot point.

If you fit that category, you should shift your thinking to other tax planning strategies to minimize your lifetime taxable liability. 

However, if you find yourself in or near these thresholds, you could consider tax planning strategies to keep your Social Security tax minimal. Consider ways to lower your Adjusted Gross Income to limit your provisional income, and keep your taxable liability low.

For more ways to do that, make sure you check out some additional content. Be sure to set time on my calendar if you’d like an individualized assessment.