[FONT="]TAXATION OF SOCIAL SECURITY BENEFITS.[/FONT]
[FONT="]Note: This explanation does “NOT” determine the “rate” at which your Social Security will be taxed, since that rate will be determined by the tax bracket that you ultimately fall into based on your Adjusted Gross Income on form 1040. This paper simply shows how to determine what portion (or percentage) of your Social Security will be included in your AGI and therefore, subject to taxation.[/FONT]
[FONT="]Terms[/FONT][FONT="]: [/FONT]
[FONT="]Provisional Income[/FONT][FONT="] = the sum of ½ of your Social Security income, plus items shown on page 2 below.[/FONT]
[FONT="]Base and Upper Threshold[/FONT][FONT="] = Provisional income levels that trigger changes in % Social Security subject to taxation.[/FONT]
[FONT="]These three cases determine what percentage of your Social Security benefits will be subject to tax:[/FONT]
[FONT="]1. [/FONT][FONT="] Provisional Income below the Base Threshold incurs zero tax on Social Security benefits.[/FONT]
[FONT="]2. [/FONT][FONT="]Provisional Income falling between the Base Threshold and Upper threshold incurs a tax on 50% the amount of Social Security benefits above the Base Threshold.[/FONT]
[FONT="]3. [/FONT][FONT="]Provisional Income above the Upper Threshold will incur taxation on Social Security Benefits of 50% the amount between the Base and Upper Thresholds plus tax on 85% of the amount over the upper threshold. [/FONT]
[FONT="]Threshold Amounts as of 01/01/2010[/FONT][FONT="] used in figuring your taxable Social Security: [/FONT]
[FONT="]Filing Status[/FONT][FONT="]
Base Threshold Upper Threshold
Single $25,000 $34,000
Head of Household $25,000 $34,000
Married Filing Jointly $32,000 $44,000
Qualifying Widow(er) $25,000 $34,000 [/FONT]
[FONT="]Examples:[/FONT][FONT="] (Assume all 3 examples are single people who fall into a 15% tax bracket.)[/FONT]
[FONT="]1. [/FONT][FONT="] Taxpayer Tom earns $20,000 in Social Security and has $14,000 AGI from his 1040. His Provisional Income is ($20,000/2 plus $14,000)=$24,000 which falls below the $25,000 Base threshold and pays no tax on any of his Social Security. He will be taxed at 15% only on the $14,000 earned on the grant.[/FONT]
[FONT="]2. [/FONT][FONT="]Taxpayer Bill earns $20,000 in Social Security and $22,000 of AGI from his 1040. Based on the his Provisional Income = $32,000, he falls between the Base and Upper thresholds. He will pay tax on his $22,000 income plus tax on ½ of the amount above the $25,000 Base, so ( ½ of $7,000) $3,500 of his Social Security is also taxable. So he owes 15% of $22,000 + $3,500. [/FONT]
[FONT="]3. [/FONT][FONT="]Taxpayer Lisa, earns $20,000 in Social Security and $35,000 of AGI from her 1040. Her Provisional Income exceeds the Upper Threshold and will owe taxes on her $35,000 cap gains plus her Social Security will be taxed on ½ of the amount between $25,000 and $34,000, plus tax on 85% of the amount above $34,000. So, she will pay 15% tax on ($35,000 cap gains + $13,000 SS) $48,000.[/FONT]
[FONT="]To Calculate Provisional Income[/FONT]
[FONT="]To arrive at your provisional income, start with your adjusted gross income, or AGI, which is the amount that will appear on the last line on Page 1 of your Form 1040. However, don't count any Social Security benefits when figuring your AGI. (You can find a Form 1040 on the IRS web site here.) [/FONT]
[FONT="]Next, take that AGI number and add the following amounts (chances are, only the first two will apply to you).[/FONT]
[FONT="]1. 50% of your Social Security benefits.[/FONT]
[FONT="]2. Tax-free municipal bond interest income (from line 8b of Form 1040).[/FONT]
[FONT="]3. Tax-free interest on U.S. Savings Bonds used to pay for qualified college expenses (from IRS Form 8815).[/FONT]
[FONT="]4. Tax-free adoption assistance payments from your employer (from IRS Form 8839).[/FONT]
[FONT="]5. The Page 1 deduction for student-loan interest.[/FONT]
[FONT="]6. The Page 1 deduction for higher education tuition and related fees.[/FONT]
[FONT="]7. The Page 1 deduction for domestic production activities (from IRS Form 8903).[/FONT]
[FONT="]8. Tax-free foreign earned income and housing allowances and certain tax-free income from Puerto Rico or U.S. possessions (from IRS Forms 2555 and 4563).[/FONT]
[FONT="]The result of doing all this arithmetic is your provisional income for the year.[/FONT]