Some taxpayers have to pay federal income taxes on their Social Security benefits1 while others are exempt. The amount of non-benefit income that a taxpayer earns/receives (from wages, interest, dividends, etc) plays a major role in determining this tax liability. IRS rules stipulate the following:
1. Taxpayers filing as “individuals” whose combined income2 is:
i) Below $25,000: all benefits tax-exempt
ii) Between $25,000 and $34,000: 50 percent of benefits above $25,000 level are taxable
iii) Greater than $34,000: $4,500 of benefits taxable as well as 85 percent of benefits beyond $34,000
2. Married taxpayers filing “jointly” whose marital combined income2 is:
i) Below $32,000: all benefits tax-exempt
ii) Between $32,000 and $44,000: 50 percent of benefits above $32,000 level are taxable
iii) Greater than $44,000: $6,000 of benefits taxable as well as 85 percent of benefits beyond $44,000
3. Married taxpayers filing “separately”:
i) Couples who lived in the same household at any time during the year: 85 percent of all benefits are taxable
ii) Couples who lived apart from each other for the entire year: use “individual” rules
EXAMPLE: Suppose Mark files as an “individual” and has a combined income of $30,000. According to the above chart, $2,500 of Mark’s Social Security benefits will be subjected to the federal income tax [Step 1) $30,000-$25,000=$5,000; Step 2) 50 percent of $5,000=$2,500]. If Mark’s combined income was instead $40,000, $9,600 of Mark’s benefits would be taxed [Step 1) $40,000-$34,000=$6,000; Step 2) 85 percent of $6,000=$5,100; Step 3) $4,500+$5,100=$9,600]
1All taxpayers collecting social security benefits should receive a Form SSA-1099 (see Page 20) from the IRS. Box 5 of the Form lists the Net Benefits for the year. This Box 5 amount should be used in all areas where this article refers to “benefits.”
2Combined Income = Income Calculation (sum of values on Form 1040 Lines 7, 8a, 8b, 9a, 10, 11, 12, 13, 14, 15b, 16b, 17, 18, 19 and 21)) + 50 percent of Social Security benefits
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