Calculating Taxes on Social Security Benefits

While some aspects of life become simpler in retirement, taxes are not necessarily one of them. Determining whether you owe income tax on your Social Security Benefits and the amount you owe can require a bit of extra work. It’s one of the reasons why so many retirees turn to income tax preparers with experience assisting SS beneficiaries.

Before performing the calculations, tax filers need to ascertain their:

• Adjusted gross income not counting Social Security benefits

• Any non-taxable interest they earn from savings or investments, like municipal bonds

• Total annual Social Security benefits

You can use that information to ascertain your “combined income.” Single filers with a combined income between $25,000 and $34,000 are required to pay income taxes on 50 percent of their Social Security benefits. Filers with combined income over $34,000 owe taxes on up to 85 percent of their Social Security benefits. Those with a combined income of less than $25,000 don’t owe income tax on any of their Social Security Benefits.

The income limits are slightly higher for married filing jointly beneficiaries. Couples with a combined income between $32,000 and $44,000 owe tax on 50 percent of their benefit while those with a combined income over $44,000 will need to pay taxes on up to 85 percent of their benefits. SS benefits typically are not taxable for couples with a combined income of less than $32,000.

Calculating Combined Income

The calculation for combined income is:

Combined Income = Adjusted Gross Income + Non-Taxable Interest + Half of Social Security Benefits

To get your adjustable gross income, you need to add up all your income and subtract eligible adjustment deductions. Income categories may include:

• Any wages or salaries you’re still earning, which include commissions, tips or bonuses

• Any earnings you get from self-employment minus your expenses

• ·Any taxable capital gains from the sale of investments or property

• Rental income

• Retirement distributions from fully or partially taxable accounts like traditional IRAs or 401(k)s

• Alimony (for divorces finalized prior to 2019)

Many adjustments are most commonly available to people who are still working, such as contributions to traditional IRAs, student loan interest or some of your self-employment taxes or health insurance. It may be in your best interest to consult with a tax planner for clarification if you’re not sure whether certain expenses qualify for inclusion in your adjusted gross income calculation.

Although non-taxable interest is not itself taxed, how much of it you earn does influence the combined income equation and, as a result, does have tax implications. Some examples of non-taxable interest might include:

• Interest earned from munis (municipal bonds), including those issued by states, counties, cities or local governments

• Interest from Series I and Series EE U.S. Savings bonds may qualify as tax-exempt if used for certain purposes, like education

• Any mutual fund holdings that include tax-exempt bonds if the interest is distributed to you

If you have questions about the taxability of any of your interest earning holdings, or whether that interest should be calculated to reach your combined income, you should consult with an experienced accountant or tax preparer. 

Professional Assistance Can Be Helpful

Depending on your income streams, retirement savings and benefits, calculating your combined income may be complicated. Gathering all the relevant documents in advance, including your SSA-1099, 1099 forms for interest and dividends and any other income records, can make the process easier. A professional may also be able to identify relevant deductions that could potentially reduce your adjustable gross income.

It may be helpful to keep this calculation in mind when deciding whether to work in retirement or how to structure your income after you begin collecting your Social Security benefits. Your earnings through part-time jobs or freelancing could potentially increase your tax burden due to a higher combined income calculation.

Timing of income and distributions from retirement accounts as well as tax-deferred accounts like Roth IRAs may allow you to better modulate your combined income and have a positive influence on your Social Security benefits taxes.

Get Help With Your Social Security or Medicare Benefits Planning in Phoenix

Are you a Phoenix retiree or worker planning for retirement? Are you interested in learning more about tax-advantaged Social Security Benefits or Medicare planning strategies? The financial advisors at Fullerton Financial Planning are here to provide clarity and answers. Schedule a meeting today.