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How are Social Security Benefits Taxed?

Posted By Jim On 06/28/2012 @ 7:15 am In Retirement | 13 Comments

In a post about reading your Social Security statement a few weeks ago [3], 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 [4], 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 [5])


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[3] post about reading your Social Security statement a few weeks ago: http://www.bargaineering.com/articles/reading-social-security-statement.html

[4] Pub 915: Social Security and Equivalent Railroad Retirement Benefits: http://www.irs.gov/pub/irs-pdf/p915.pdf

[5] tracy_olson: http://www.flickr.com/photos/tracy_olson/64654913/sizes/l/in/photostream/

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