How to Determine if Your Social Security Retirement Benefits are Taxed

by Robert D. Cavanaugh, CLU

Up to 85 percent of your Social Security retirement benefits may be taxable. Here's how to find out how much is taxable and what you can do to reduce or eliminate any tax.

Of all the financial issues surrounding being a senior, the one that tops the list in terms of anger is the fact that, depending on the situation, Social Security retirement benefits are taxable. My experience indicates that some seniors are completely unaware of this fact.

I have also had to sit and listen to the ranting of those who are aware. It goes something like this: "I already paid tax on the earnings during my working years. The Social Security withdrawn from my income each pay check was a tax. This sounds like a tax on a tax." And on and on...

After letting the person blow off some steam, my response typically was, "Hey, don't shoot the messenger! I'm here to see if any of your Social Security benefits are taxed, if so, how much and what we can do to reduce or eliminate that tax." So let me take you through the first part of our conversation.

Whether or not you are taxed depends on:

1. The amount of your income.
2. Whether or not you have income from sources other than Social Security.

The amount of your tax depends on:

1. Your marital filing status: single or married.
2. The amount of your income.

The tax on Social Security retirement benefits was put into effect in 1983. Tax was applied on up to 50 percent of benefits. In 1993 this was increased to 85 percent. Here's how the calculation goes...

The first step is to calculate your "provisional income". So grab last year's tax return.

1. Subtract your taxable S.S. benefits (line 20b) from your Adjust Gross Income (line 37).
2. Add one half of your total S.S. benefits (line 20a).
3. Add any tax exempt interest (line 8b).
4. The result is your "provisional income".

Once you know this number, you can apply the rules to determine how much of your S.S. is taxed. Again, this depends on whether you are married or single and the amount of your income.

Let's look first at a married couple filing jointly. Here is the math...

1. If your provisional income is below $32,000, you don't have a problem.
2. For provisional income over $32,000:
1. Take the provisional income between $32,000 and $44,000 and divide it by two.
2. If your provisional income is above $44,000, take the total provisional income, subtract $44,000 and multiply by 0.85.
3. Add 2a and 2b.
4. Multiply your total S.S. benefits (line 20a) by 0.85. e. The lesser of your result on 2c and 2e above is the amount of your S.S. benefit taxed.

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