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How are Social Security Benefits Taxed?

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CalculatorIn a post about reading your Social Security statement a few weeks ago, reader J. Shoe asked the following question:

Just trying to find out if it is true that any Soc. Sec. benefits you start taking are taxed starting at 50% of the money you receive. So that if you take 5K from SS in one year, they put a tax on 2.5K of that money. Can that be real and their a link to see this horrific scam. It’s bad enough they borrow from SS without the intention of paying it back, but this crazy

I don’t see how it’s crazy but I also didn’t fully understand how Social Security benefits are taxed. For more information, I turned to Pub 915: Social Security and Equivalent Railroad Retirement Benefits, which is the IRS document that explains everything.

Are Your Benefits Taxable?

Add up all the benefits you received, which is in box 5 of your Form SSA-1099. Take half of that amount and add it to your taxable pensions, wages, interest, dividends and other taxable income. Then add any tax exempt interest income, such as from muni bonds or savings bonds. Now compare that number with the base amount for your filing status (these are 2011 figures):

  • Single, Head of Household, or Qualifying Widow(er): $25,000
  • Married Filing Jointly: $32,000
  • Married Filing Separately (living apart): $25,000
  • Married Filing Separately (living together at any time): $0

If your number is less than the base amount for your filing status, you are not taxed on any portion of your benefits. If your number is more than the base figure, you’ll be taxed on 50% of your benefits. If your number is greater by a significant amount ($9,000 for single, HoH, and Qualifying Widow(er) or $12,000 for Married Filing Jointly), then you’ll be taxed on 85% of your benefits.

Should Social Security benefits be taxed? I don’t think so. When you make (forced) contributions, those amounts are deducted from your income but you still pay income taxes on it. When you get disbursements from the SSA, you’re taxed on up to 85% of your benefits, which means you’re getting a 15% discount but it’s on contributions you were already taxed on. It’s a little messy because you get more out of it than you put in but you were taxed going in, so should you be taxed going out? It’s like making a contribution to a Roth IRA and then being taxed on the back end too.

(Photo: tracy_olson)

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13 Responses to “How are Social Security Benefits Taxed?”

  1. Krissi says:

    Most people are surprised to learn that Social Security benefits are subject to income tax, and therefore fail to plan for this expense.

    As you can see from the numbers above, if Social Security is your only income you probably won’t have to pay any taxes on your benefits. However, if you have pensions or investment income, or if you are still working when you start benefits, then some of those benefits could be taxable.

    It’s important to take taxes into account when you are doing retirement planning; otherwise your retirement plan could get derailed by unexpected tax bills.

    For example, some people start Social Security benefits while they are still working (especially if they are still working at full retirement age – currently 66 for people retiring now). This might be a good idea if you have debts to pay off, or if your health is poor, or if you just want to invest the extra income in your retirement portfolio.

    However, if you’re still working, there’s a good chance that up to 85% of your Social Security will be taxable. All of a sudden that investment return on the extra income doesn’t look so good, or you’re not able to pay off as much debt as you had hoped, or your budget is bust because you failed to consider the tax consequences… Either way, taxes need to be considered when you are planning for retirement and deciding when to start your Social Security benefits.

    Finally (sorry for the long comment), there are many strategies being suggested to help save Social Security including increasing the amount of benefits subject to income tax as well as increasing the amount of tax paid on Social Security benefits. I wouldn’t be surprised if one or both of these strategies is implemented in the next few years, so tax planning in regards to retirement and Social Security is going to be even more important down the road.

    • Charles says:

      The fact that Social Security is taxable is disgusting. It is “income” that has been taxed already. Just like combat veterans have to pay taxes on the “income” they receive for serving in harm’s way. It’s like being charged for not bringing back that boot on the leg left behind in the war zone.

      • Jim says:

        Those are two totally different things.

        I agree with you that paying taxes on Social Security is unfair, in part because it’s already being taxed. It has nothing to do with combat pay and it is definitely nothing like “charged for not bringing back that boot on the leg left behind in the war zone.” That’s just sensationalism and you know it.

        As for combat pay, I’m not entirely sure how it’s taxed but I do know that they aren’t taxed on their income when deployed in a combat zone. The military is still a job and it’s voluntary. They are getting a benefit from not having their combat pay taxed.

        • Jen says:

          Hi Jim,

          You’re right–combat pay is not taxed. In a combat zone almost no benefits or pay is taxed. Regular military pay is taxed and again you’re right–its a job and its voluntary. I know because I’ve been in 26 years and deployed 3 times.

          Jen

        • Geo says:

          Jim, You state: “I agree with you that paying taxes on Social Security is unfair, in part because it’s already being taxed.”
          When you pay SS (approx. 7%) the money you pay has been taxed. Your employer also contributes a like amount on your behalf to SS. When you receive the benefit later on, half of the money you received is considered from money you have contributed and is not taxed again. The other half of the money you received is considered to be from the employeer’s contribution. You did not pay taxes on the employer’s contribution when the employer made the contribution to SS. Thus the tax to the recipiant on 50% of the amount received. Hope this is clear. Geo.

      • Ben says:

        Hi Charles,
        Too much hyperbole blunts the point you are making. I appreciate your sentiment, and even identify with your emotion, yet encourage a more thoughtful approach.

        -Ben

  2. Shirley says:

    Although I am admittedly a willing and grateful recipient of this SS tax break, I don’t understand the reasoning behind it. I was not taxed on the money I contributed so why shouldn’t I be taxed on that money when it is distributed? I know that over the years we will receive far more than we paid into SS.

  3. Spewin says:

    “When you make (forced) contributions, those amounts are deducted from your income and you don’t pay income taxes on it.”

    Are you sure about this? Can you source it. I am 99.9% sure that you can not deduct any FICA on your Federal tax return.

  4. Don says:

    All commenters omit the employer’s contribution to SSA, as if it doesn’t exist. This is, to the employer, a deductible expense. No taxes have been paid on it. The portion of your benefit that is taxable, reflects that 50% of the deposits to SSA have not been taxed. If you are self-employed, the situation changes. You paid both halves of the deposits.

  5. Bering Hill says:

    While there may be some logic for taxing Social Security Benefits since the employer portion has not been taxed, it still puts the taxpayer in a much higher tax bracket. An excellent article regarding this can be read at http://seekingalpha.com/author/larry-layton/instablog.

    The gist of the article is that while Social Security benefits are being taxed, the IRS is adding them to your other taxed income causing the taxpayer to be taxed from 150% to 185% above the normal tax brackets of 10%, 15% or 25%. For each dollar added to income, another 50 cents up to 85 cents is added to taxable income pushing the taxpayer into tax brackets as high as 46.25%.

    The income ranges of $25,000 to $34,000 for single taxpayers and $32,000 to $44,000 for married taxpayers is the same today as it was in 1983 when this tax was created. It was created when national average income (according to the article) was $15,239. If the income ranges were inflation adjusted, this tax wouldn’t hit so many retirees.

    The article has graphs and a good explanation of this problem.


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