Determining the Taxable Amount of your Social Security Benefits

Educational Social Security - Flickr: Chris PotterDid you notice the Social Security tax you paid on your return this year?

While not all of the benefits are taxable, up to 85% can be. You can see this on the front page of your Form 1040 of your tax return on lines 20a and 20b.

Box 20a lists your total benefits and 20b shows the taxable amount which is counted towards your income. The higher the percentage your Social Security benefits are taxed, the higher your taxable income will be, which increases the taxes you owe.

Your taxable income number and filing status determine what marginal tax bracket you are in each year. While you may be used to seeing yourself in a certain marginal tax bracket, for example 10%, 15%, 25%, 28% etc., you may not realize the way Social Security benefits affect your marginal tax bracket.

Social Security can cause your marginal tax bracket to increase by 150% or 185%. For example if you are in the 10% marginal tax bracket your actual tax bracket with taxable Social Security benefits factored in could be 15% or 18.5%, and if you are in the 15% marginal tax bracket your actual tax bracket could be 22.5% or 27.75%.

If your income items from the front page of your Form 1040 are more than the deductions on the front page of Form 1040, then your Social Security benefits are likely taxable. Also, if this amount is above the base amounts listed in the following table then your benefits are taxable. To view an example showing the process to calculate your exact taxable amount, please see the following IRS publication on pg.7.

Social Security Base amount of Mod. AGI Causing Social Security Benefits to be Taxable
50% Taxable85% Taxable
Married Filing Jointly$32,000$44,000

What can I do to minimize the amount of my benefit that is taxable?

AGI factors in to the amount of your Social Security benefits that are taxable. Your AGI comes from your Form 1040 when filing your taxes each year. Income items such as wages, interest, dividends, capital gains, IRA distributions, and Pension distributions are totaled and then subtracted from this amount are items such as alimony paid and deductible IRA’s to equal your AGI. An example of a way to decrease your income is to realize fewer capital gains in a certain year which would decrease your AGI and in turn may decrease the amount of your Social Security benefits that are taxable.

By looking through your previous year’s tax returns, your financial advisor will gain insight to help improve tax efficiencies. Contact our office if you have any questions.


Photo credit: Flickr – Chris Potter

More Like This

Download our 5 Questions to Ask Your Financial Advisor eBook

We break down some of the most important questions we are asked on a regular basis.

Blog Categories