My Neighbor Doesn’t Pay Tax on Social Security – Why am I?

My Neighbor Doesn’t Pay Tax on Social Security – Why am I?

This question arises frequently as the amount of Social Security Benefits taxed can be at 0%, 50% or even 85% which is the max.

To begin, lets clarify which benefits may be taxable. Social Security, Survivor, and Disability Benefits may be taxable, however Supplemental Security Income (SSI) payments are not. Equivalent tier 1 Railroad Retirement benefits are the benefits a railroad employee would have been entitled to receive under the Social Security System and may be taxable. These amounts are reported on Form SSA-1099 or Form RRB-1099 and will be sent to you after December 31st of the current tax year.

The driving factor in the amount of Social Security taxable, is the income you make in addition to Social Security.

1. You must first take one half of your annual social security benefit plus one half of your spouse’s social security benefit if Married Filing Joint (MFJ)
2. Add all your other income to include wages, interest, dividends, and even tax-exempt income to arrive at your total provisional income.

Remember, if you are married and file a joint return, you and your spouse must combine your incomes and benefits to figure if your combined benefits are taxable. Even if your spouse did not receive social security benefits, you must add their income to determine the amount of your benefits which are taxable.

Next you must figure your base amount.

1. If you are filing Single, Head of Household, or Qualifiying Widow(er) your base amount is $25,000
2. If you married filing jointly, your base amount is $32,000
3. Married filing separate has different base amounts depending on whether you lived with your spouse during the year.

Bracket Location                                   S,HH,QW                               MFJ                           Taxable SS
Above Upper Base Amount                $34,000 +                        $44,000 +                        85% MAX
Between Base Amounts                      $25,000 to $34,000       $32,000 to $44,000     50% MAX
Between Lower Base Amount             0 to $25,000                    0 to $32,000                   NONE

The chart above illustrates the base amounts compared to filing status.
a.  Determine the maximum amount of benefits subject to tax using the steps below:
If provisional income is less than the lower base amount, NO benefits are taxable
b.  If between brackets, a Maximum of 50% of benefits may be subject to tax
c.  If it is more than the upper bracket base amount, a Maximum of 85% of benefits is subject to tax

Multiply the amount of provisional income between the brackets by 50% and the amount above the upper base amount by 85%, and then add them together.

Example:

Married Couple Filing Joint
Wage Income $21,000
Interest $ 500
Dividends $ 1,200
Capital Gain $ 500
Social Security $37,000
½ Social Security $18,500
Total Income $41,700

Income for Married Filing Joint fell between base amounts of $32,000 to $44,000 so we use the base amount of $32,000 and a Max Taxable Social Security of 50%.

$41,000 Total Income
-$32,000 Base Amount
$ 9,700

$9,700 X 50%=$4,850 So in this scenario, only $4,850 of the $37,000 Social Security Benefit is taxable