Q & A: January 2019

Q & A: January 2019

How is the Tax on Social Security Benefits Calculated?

Q: My spouse and I retired in 2018, and this will be our first tax season with Social Security benefits. Can you explain how Social Security benefits would affect our taxable income?

A:  If you receive income from one or more sources in addition to Social Security, chances are that a portion of your Social Security benefits may be taxable. New retirees are often surprised to learn that Social Security benefits are taxable, so congratulations for your timely question.

Since 1984, Social Security beneficiaries with income exceeding certain thresholds are required to figure part of their Social Security benefits as taxable income. At the time, less than 10% of all Social Security recipients were subject to the tax.

While incomes have gone up significantly since then, the thresholds that subject a portion of Social Security benefits to tax have never been adjusted. That means, as incomes rose over time, an increasing number of retirees pay federal income taxes on a portion of their Social Security benefits. In fact, TSCL’s Senior Surveys have found that on average, 56% of Social Security households pay taxes on a portion of their Social Security benefits.

In order to learn if a portion of your benefits may be subject to tax, add your adjusted gross income, plus any nontaxable interest, and one half of your Social Security benefits to get your “combined income.”  If your combined income is between $25,000 and $34,000 (individual) or $32,000 and $44,000 (joint) then up to 50% of your Social Security benefits may be taxable. If your income is more than $34,000 (individual) or $44,000 (joint) then up to 85% of your benefits may be taxable.

The recent tax law almost doubled the standard deduction, and increases the deduction for taxpayers age 65 and older. On the other hand, personal exemptions have been eliminated.  Unless you are well versed in tax preparation, you may want to get help from a tax professional to help you through filing your taxes.

To more precisely determine whether your Social Security benefits are taxable try the Interactive Tax Assistant “Are My Social Security or Railroad Retirement Tier I Benefits Taxable?”

The IRS has a worksheet you can download to determine whether your benefits are taxable: https://www.irs.gov/pub/irs-pdf/n703.pdf