How Social Security benefits are taxed if you work

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 Q. I’m confused about how Social Security is taxed. I’m 70 and I work part-time to stay busy, but I don’t want to work too much that my tax bill increases. Help!

A. You’re faced with the same question as other seniors who want to make sure their part-time jobs don’t cause problems for the rest of their financial lives.

It used to be simple: Social Security benefits were tax-free, period, said Lisa McKnight, a certified financial planner with Lassus Wherley in New Providence. But then, as part of a “Save Social Security” plan, Congress decided to tax up to 50 percent of benefits. Later, that number was boosted to up to 85 percent, with the extra revenue going to shore up Medicare, she said.

“To determine whether your Social Security benefits will be taxed, the IRS uses what it calls your `combined income,” McKnight said. “This is the sum of your adjusted gross income, non-taxable interest and half of your Social Security benefits.”

If your combined income exceeds a certain limit, 50 to 85 percent of your benefits may be taxed, she said.

The full rules are in IRS Publication 915, but McKnight offered this overview.

She said the applicable income for Social Security taxation includes all items which are normally part of your adjusted gross income, plus tax-exempt interest income, plus 50 percent of your Social Security benefits. The 50 percent represents the fact that half of your Social Security contributions were made by your employer and thus not taxed, she said.

There are two relevant threshold amounts that drive how much of your Social Security is taxed. The lower threshold is $25,000 if you are single or $32,000 if married filing jointly. The upper threshold is $34,000 if you are single and $44,000 if married filing jointly.

If your “combined income” is below the lower threshold, none of your benefits are taxable.

“For every $1 of `combined income’ between the lower and upper thresholds, 50 cents of your Social Security benefits become taxable, up to 50 percent of your total benefits,” McKnight said. “For every $1 of relevant income above the upper threshold, 85 cents of your Social Security benefits become taxable, up to a total taxable amount of 85 percent of your benefits.”

She said there are to estimate your taxable Social Security benefits.

Step 1: Combined Income – The first step in estimating any taxes you might have to pay on your Social Security benefit is to calculate your “combined income,” she said. This is the sum of all wages, taxable and non-taxable interest, dividends, pensions, self employment and other taxable income plus 50 percent of your annual Social Security benefits:


$30,000 in Social Security benefits (50% is $15,000)
+45,000 in wages and other income
= $60,000 of “Combined Income”

Step 2: First Threshold – Subtract the first threshold and multiply by 50 percent:


$60,000 of Combined Income
– $32,000 (first threshold for married)
= $28,000 above the first threshold
x 50%
=$14,000 of taxable benefits

Step 3: Second Threshold – Subtract the second threshold and multiply by 35 percent:


$60,000 of “Combined Income”
-$44,000 (send threshold for married)_
x 35%
= $5,600 of taxable benefits

Step 4: Add amounts from Step 2 and Step 3


$14,000 +5,600 = $19,600

Step 5: Check the Max – Calculate and apply the maximum:


85% x $30,000 (total Social Security benefits) =$25,500

McKnight said If Step 4 is less than the max, Step 4 is the taxable amount. If Step 4 is greater than the max, then Step 5 is the taxable amount.

Each January you will receive a Social Security Benefits Statement (Form SSA-1099) showing the amount of benefits you received in the previous year.

“The SSA-1099 form comes with a worksheet to help you determine if any of your benefits are taxable,” she said. “The numbers can be tricky and at times confusing. To get a handle on the numbers, I suggest talking to your accountant.”

McKnight said if you do have to pay taxes, you can make quarterly estimated tax payments or choose to have federal taxes withheld from your benefits. Whichever you decide, at least there won’t be any surprises.

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This story was first posted in April 2015. presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.