Will you have to pay income tax on the Social Security benefits you receive? It depends on many variables.
The IRS uses a measurement called “combined income” to determine if you need to pay taxes on any part of your Social Security benefits. Combined income is made up of two parts:
- 50% of your Social Security benefits and;
- ALL of your other income.
Your “combined income” equals ½ of your Social Security benefits + your adjusted gross income + nontaxable interest or other nontaxable income (if any). For many taxpayers, there is no difference because they do not have income that need to be excluded from their “Adjusted Gross Income” (AGI) total.
If you are married, filing jointly and your total combined income is between $32,000 and $44,000, you may have to pay an income tax on up to 50 percent of your benefits. If your combined income is more than $44,000, up to 85 percent of your benefits may be taxable. If you are filing a single return, the threshold is $25,000. If your combined income is between $25,000 and $34,000, you may have to pay income tax on up to 50% of your benefits. If your combined income is more than $34,000, up to 85% of your benefits may be taxable.
Do not panic! The information above is sometimes misinterpreted or misunderstood. It does not mean that you owe up to 50% or 85% of your Social Security benefits in taxes. It does mean that some of your benefits may be added to the base amount (taxable income) on which you are taxed. Social Security benefits are not taxed at all if the combined income amounts are below $25,000 for single filers or $34,000 for joint filers.
Here is an example:
During 2016, a couple filing a joint return received a total of $25,000 in Social Security benefits. This includes the cash deposits from Social Security and also the insurance premiums paid to the Medicare system. These amounts are reported in Box 5 of Form SSA-1099, sent to taxpayers each year.
- Part 1 of the couple’s combined income is 50% of $25,000 or $12,500.
- Part 2 of combined income is ALL of the couple’s income that did not come from Social Security.
Unlike Adjusted Gross Income (AGI), there are no adjustments when figuring combined income. These special categories of nontaxable income include things like interest paid on city and state bonds and nontaxable withdrawals from pension plans. Let’s say that this couple had a total income of $24,000 from sources other than Social Security. Their combined income is the total of parts 1 and 2 or $12,500 plus $24,000. The combined income is $36,500, which is $2,500 over the threshold amount for joint filers.
What does this mean?
Once more, do not panic! It does not mean that they owe $2,500 in taxes. It does mean that 50% of the amount over the threshold ($1,250) is added to the AGI. After taking their two personal exemptions and a standard deduction, their taxable income will be in the 10 or 15 percent bracket, so the effect will be to add $125 or $187.50 to their total tax.
In short, it is not possible to cover all of the possible rates, rules and other variables that may affect these calculations. These variables may change from year to year and their consequence increases as non-social security income grows. For some taxpayers, the computer based tax programs that are widely available can handle these problems and the year-to-year changes. However, if you have any doubt, you should consult a tax professional, a CPA or an attorney who can answer tax related questions.
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