Note: This article compiles information from a Social Security Office or Retirement and Disability Report: Taxation of Social Security Income. Note that we are not tax professionals – consult your accountant or other expert before you make any important decisions on this issue.
December 18, 2015 — Many of our members are either not aware that they might have to pay taxes on their Social Security benefits, or if they are, not sure how much they might have to pay. This article will try to shed some light on the issue.
Social Security beneficiaries with total income exceeding certain thresholds have been required to claim part of their Social Security benefits as taxable income since 1984. The income thresholds for taxation of benefits have remained unchanged since Congress first established them but, because wages have increased, the proportion of Social Security beneficiaries who must pay federal income tax on their benefits has risen over time. In 1984, less than 10 percent of beneficiaries paid federal income tax on their benefits. A Social Security Administration (SSA) microsimulation model, Modeling Income in the Near Term (MINT), projects that 52 percent of families receiving Social Security benefits will pay income tax on their benefits in 2015. Most of these families will be in the upper half of the total-income distribution. Some 13 states also tax Social Security income, which is not discussed here.
For 2015, beneficiary families will owe a median of less than 1 percent of benefits in income tax, but one-fourth of those families will owe 11 percent or more of their benefits in income tax. The model projects that the median percentage of benefits owed as income tax by beneficiary families will eventually rise to about 5 percent. Among the 52 percent of families that are projected to owe federal income tax on their Social Security benefits in 2015, the median share of benefits owed as tax will be 11 percent, rising to 12% by 2050.
So how much do you have to pay in federal income taxes on your Social Security benefits?
The formula is not that easy to explain. This link provides a chart from the SS report that explains the formula for calculating taxable SS income. Here is a simplistic view of the elements in that formula:
Single filers with modified Adjusted Gross Income (AGI) below $25,000 pay no tax. Those with modified AGI from $25,000 – $34,000 pay taxes on the lesser of 50% of benefit income or the amount of AGI over $25,000. Those with modified AGI over $34,000 will pay taxes on as much as 85% of benefits.
Married filing jointly will see no portion of their benefits as taxable with modified AGI below $32,000. Above that there are 2 tiers of taxation, with taxes on either 50% or 85% of benefits.
If you can figure out your modified AGI (Adjusted Gross Income) once you retire you will be able to estimate what you might have to pay in federal income taxes on your Social Security benefits. This link provides a definition of AGI. Generally, modified adjusted gross income is your adjusted gross income plus any tax-exempt Social Security, interest, or foreign income. To complete the analysis you also have to know how much your SS benefits will be. To figure out that part of the equation, here is a link to the SS Administration’s Benefits Estimator. If you are still unsure, ask your tax professional to estimate it for you.
There is one important thing to remember from all this: you might not be able to count on spending all of your SS benefits income – if your other income is high enough some of it might go to pay taxes.
Comments? Many people believe that Congress should modify the thresholds for benefits taxation, since so many more people are affected as their benefits creep up with inflation. Others believe that this is progressive taxation and should be allowed to happen. What do you think? Are you paying taxes on your benefits – were you surprised either way? Please share your thoughts in the Comments section below.