Marc Ang discusses about some of Social Security benefits tips and the technical aspects of taxation on Social Security benefits and also gives examples on calculating social security benefits tax. For many active seniors who want to continue working, or are savvy investors making passive income, there are some tax nuances to consider.
Many seniors ask the question, “Are my social security benefits taxable?” If social security was your only source of income, and you make no other money, your benefits are not taxable. But if you chose to work, or you’re earning passive income from certain investments that are not taxable, such as municipal bonds, your social security benefits become taxable. If you can handle a bunch of math, read on about calculating social security benefits tax.
Calculating Social Security Benefits Tax
When retirees are making substantial income beyond their social security, up to 85% of those benefits could be taxable. This takes into account your MAGI (Modified Adjusted Gross Income), which includes your AGI (Adjusted Gross Income), nontaxable interest and foreign earned income.
If this MAGI exceeds two hurdles, you are paying more taxes. Currently the hurdles are:
- $25,000 and $34,000 for a single person.
- $32,000 and $44,000 for a married couple filing jointly.
First Hurdle Taxation
This first hurdle represents about 50% of the amount subject to tax.
Your Income: Second Hurdle > MAGI + ½ of Social Security Benefits > First Hurdle
The taxable amount of the Social Security Retirement benefits is the lesser of:
- 50% of Social Security Benefits
- 50% [MAGI + 0.50 (Social Security Benefits) less Hurdle 1 Value]
Let’s do the math!
- Jack and Jill receive Social Security benefits of $25,000, and non-taxable municipal bond income of $10,000.
- 50% of SS Benefits = 0.5(25,000) = $12,500
- 50% [MAGI + 0.5(SSB) – Hurdle 1] = 0.5[35,000 + 0.5(12,500) – 32,000] = $9,250
- Jack and Jill’s taxable SS income would be $9,250, which is the lesser of the two.
Second Hurdle Taxation
This second hurdle represents about 85% of the amount subject to tax.
Your Income: MAGI + ½ of Social Security Benefits > Second Hurdle
- 85% of Social Security Benefits
- 85% [MAGI + 0.5(Social Security Benefits) less Hurdle 2], plus the lesser of:
- $6,000 for MFJ, or $4,500 for all other taxpayers
- The taxable amount calculated based on the 50% formula and only considering Hurdle 1
Let’s do the math!
- Jack and Jill receive Social Security benefits of $40,000, and non-taxable municipal bond income of $10,000.
- 85% of SS Benefits = 0.85(40,000) = $34,000
- 85% [MAGI + 0.5(SSB) – Hurdle 2] = 0.85[50,000 + 0.5(40,000) – 44,000] = $22,100
- Jack and Jill’s taxable SS income would be $22,100, which is the lesser of the two.
Alternate Formula for Taxation on Social Security Benefits
- A = Excess of: MAGI + ½ SS benefit over first hurdle
- B = Excess of: MAGI + ½ SS benefit over second hurdle
Taxable amount is the lesser of the three formulas
- 50% (A) + 35% (B)
- 85% of Social Security benefit
- 50% of Social Security benefit + 85% (B)
Let’s do the math!
So let’s say Jack and Jill have a regular income of $50,000, municipal bond income of $10,000 and receive Social Security benefits of $30,000.
- A: Excess (taxable portion of SS) = $75k – $32k = $43k
- B: Excess (taxable portion of SS) = $75k – $44k = $31k