Are Your Social Security Benefits Taxable?

Editor’s Note: Have recently started collecting Social Security benefits and now you need to know if they are taxed? You’re in the right place. Read on to learn about Social Security and taxes…

Are Social Security benefits taxable? The taxation of Social Security benefits ultimately depends on your other income. In the worst case scenario, 85% of your benefits would be taxed. (This doesn’t mean you pay 85% of your benefits back to the government in taxes—merely that you would include 85% of them in your income subject to your regular tax rates.)

The figure you will use to determine the tax consequences is what is called your provisional income. Your provisional income is essentially your total income plus half of your social security benefits. This number is derived by taking all your income other than social security benefits, including tax-exempt income items, and adding that to your spouse’s income if you file jointly. Then add half of your social security benefits to that total. Now you will apply the following rules:

1. If your income plus half your benefits is not above $32,000 ($25,000 for single taxpayers), none of your benefits are taxed.
2. If your income plus half your benefits exceeds $32,000 but is not more than $44,000, you will be taxed on:
   • one half of the excess over $32,000
   • one half of the benefits (Whichever is lower.)

3. If your income plus half your benefits exceeds $44,000 ($34,000 for single taxpayers), up to 85% of your benefits will be taxed. (This calculation can be more complicated, but that is the general rule.)

If you aren’t paying tax on your Social Security benefits now because your income is below the above floor, or you are paying tax on only 50% of those benefits, an unplanned increase in your income can have a massive tax cost. You’ll have to pay tax on the additional income, you’ll also have to pay tax on (or on more of) your Social Security benefits, and you may get pushed into a higher marginal tax bracket.

This situation might arise, for example, when you receive a large distribution from a retirement plan (such as an IRA) during the year or have large capital gains. Careful planning might be able to avoid this stiff tax result. For example, it may be possible to spread the additional income over more than one year, or liquidate assets other than an IRA account.

If you know your Social Security benefits are taxed, you can voluntarily arrange to have the tax withheld from the payments by filing a Form W-4V. Otherwise, you may have to make estimated tax payments.

If you fall into the third category or are anticipating an increase in income in the future, utilize our free income tax calculator to estimate your tax bill, or contact your local H&R Block Office to help you minimize your tax burden on Social Security benefits.