Taxing Social Security Benefits

A recent study by the Social Security Administration projected that an average of 56% of households receiving Social Security benefits will owe federal income tax on some or all of their benefits during the period from 2015 to 2050.1 This typically applies to taxpayers who have other substantial income, such as from a pension, investments, or employment.

The formula for determining the tax liability of benefits is somewhat complicated but may be worth taking time to understand. Whether you are already receiving Social Security or projecting your future retirement income, knowing how much of your benefits might go toward taxes is important for realistic planning.

Combined Income

The tax liability for Social Security benefits depends on your “combined income,” sometimes referred to as modified adjusted gross income (MAGI). For most people, this is adjusted gross income plus tax-exempt interest (such as from municipal or Treasury bonds) plus one-half of your Social Security benefits.

If your combined income exceeds a “base amount” of $25,000 ($32,000 for joint filers), you may owe federal income tax on up to 50% of your Social Security benefits. If your combined income exceeds a higher base amount of $34,000 ($44,000 for joint filers), you may owe tax on up to 85% of your benefits. Single-filer base amounts apply to those filing as head of household, qualified widow/widower, or married filing separately if spouses did not live together during the year. If you are married filing separately and lived with your spouse, the base amounts do not apply, and you will probably pay taxes on all your benefits.

The taxable portion of your benefit would be included with other ordinary income and taxed at your marginal rate.

Increasing Tax Liability

The combined income thresholds, which were set in 1983 and 1993 and intended for high-income beneficiaries, have never been indexed for inflation. This has increased the percentage of beneficiary households who are subject to taxes on their benefits from 8% in 1983 to 52% in 2015. For those whose benefits are taxed, the average percentage of benefits that goes toward paying taxes is expected to rise from 11.9% in 2015 to 14.7% in 2050.2 Adjusting these base amounts is among the many provisions considered in broader Social Security reform.3

If you are already receiving Social Security benefits, you should receive Form SSA-1099 each January, listing the amount of benefits you received in the previous year. If you expect to owe federal income taxes, you can pay estimated taxes with Form 1040-ES, have additional taxes withheld from other income, or request to have taxes withheld directly from your Social Security benefits by completing Form W-4V, Voluntary Withholding Request.

 
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