A common question that I receive is based upon the taxation of Social Security benefits.
Are Social Security benefits taxed and, if so, how do I know how much of my benefits will be taxed?
The answer is that Social Security benefits ARE taxed.
Let’s look at the answer in more detail…
The good news is that the state of California does not impose an income tax on Social Security benefits. All your Social Security benefits are excluded from your state income tax return.
The taxation of Social Security at the federal level is based upon the amount of “Provisional Income” that an individual or couple has. Depending on the couple’s income tax filing status and the amount of Provisional Income for the year, the percentage of Social Security benefits that are subject to taxation can be found in the following chart:
For a couple filing jointly that has Provisional Income over $44,000, 85% of the couple’s Social Security benefit would be included on the federal income tax return. These Social Security benefits would be subject to the couple’s marginal income tax rate (10%, 15%, 25%, 28%, etc).
What is Provisional Income, though?
Provisional Income is calculated by adding up a recipient’s gross income (without Social Security), their tax-free interest, and 50% of their Social Security benefits.
For example, a couple has $40,000 per year in Social Security benefits, $20,000 per year in investment income, and $5,000 per year in tax-free interest from municipal bonds.
This couple’s Provisional Income would be:
$20,000 (50% of Social Security benefits)
$20,000 (investment income)
$ 5,000 (tax-free interest)
______
$45,000 Provisional Income
According to the chart, 85% of their $40,000 per year Social Security benefits ($34,000) would end up in the taxable income portion of their tax return and be subject to federal taxes.
Incidentally, if they were able to reduce their Provisional Income by more than $1,000, only 50% of their Social Security benefit would be subject to taxation.
Careful planning can reduce provisional income and improve income tax outcomes.
Unfortunately, the provisional income brackets are not subject to inflation, and so more and more Social Security beneficiaries are having their benefits taxed each and every year.
If you have any question about the taxation of your Social Security benefits, please contact me.
