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How is Social Security taxed?
Old 04-16-2021, 05:33 PM   #1
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How is Social Security taxed?

I've seen that if your income is over a certain amount (depending on filing status), up to 85% of your SS benefits are taxable. It looks like the cutoff is pretty low - $44,000 for MFJ. Is SS taxed as regular income or does it have a special rate like capital gains do? Is there a good worksheet or calculator you use for this?
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Old 04-16-2021, 05:41 PM   #2
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Whatever amount of SS is deemed taxable is part of your AGI, and taxed accordingly.
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Old 04-16-2021, 05:45 PM   #3
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Whatever amount of SS is deemed taxable is part of your AGI, and taxed accordingly.
Thanks. That's what I figured.
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Old 04-16-2021, 05:53 PM   #4
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See page 7 for the calculation.

https://www.irs.gov/pub/irs-prior/p915--2020.pdf
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Old 04-16-2021, 05:54 PM   #5
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I just do simulations with my tax program (turbo tax). Pretty certain the online tax estimators like dinkytown and taxcaster handle it just fine too.
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Old 04-16-2021, 06:39 PM   #6
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Up to 85% is taxable. It is taxed just like interest and ordinary dividends.
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Old 04-16-2021, 06:42 PM   #7
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I have put worksheet 1 from pub 915 into a spreadsheet to help me figure out how the taxability of social security is done. Basically, you need to compute your modified AGI which is 1/2 of your social security income plus the amounts from form 1040 lines 1, 2a, 2b, 3b, 4b, 5b, 7 and Schedule 1 line 9. The stuff you add in is basically wages, interest (including non-taxable interest), dividends, pensions, IRA distributions, capital gains. (It's a bit more complicated than that, but I can't put all of the IRS rules in a post).

For MFJ, if that number is less than $32000, none of your social security is taxable. If it is between $32000 and $44000 then half of it is taxable. If it is over $44000 then 85% is taxable. It social security was your only source of income (not likely) you and spouse could receive up to $64000 in social security benefits and not be taxed. The entire computation is quite complicated so if you really want to analyze your situation I'd recommend using a "what if" feature in a tax program or building a spreadsheet that incorporates Form 1040 and Worksheet 1 from publication 915. The former is easier, I use the latter but check it against my tax program for debugging purposes.
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Old 04-16-2021, 06:58 PM   #8
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The Bogleheads wiki article Taxation of Social Security benefits covers it well.
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Old 04-16-2021, 06:59 PM   #9
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Originally Posted by Dtail View Post
See page 7 for the calculation.

https://www.irs.gov/pub/irs-prior/p915--2020.pdf



My DH works part time farming and our tax guy did this yesterday. Hubby did not take his MRD from his retirement account in 2020. We funded my spousal IRA , the spousal IRA kicked our taxable SS down a bracket ...we ran the number for a Roth and an IRA because we were close to the 10% savers credit. I planned to do the Roth but due to the mondo savings on the SS we did the IRA which kicked me into the 20% savers credit and lowered our taxable SS number. FYI


This makes it seems like they are crediting you twice for your IRA, but what do I know..the total amount of SS listed as taxable was half.. minus the amount I funded to my IRA. My guy used his computer so I have to go with it.
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Old 04-16-2021, 07:03 PM   #10
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Thanks everyone. A ton of great info in your responses. I appreciate it.
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Old 04-16-2021, 07:58 PM   #11
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I use this calculator -

https://www.calcxml.com/calculators/...d?skn=#results
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Old 04-17-2021, 08:08 AM   #12
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Unfairly, IMO. The parameters for when it's taxed have never been adjusted for inflation.
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Old 04-17-2021, 08:16 AM   #13
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Just come live in Canada. They make the calculation of SS taxes so much easier (according to what I read. I haven't started taking mine yet). They tax 85% of SS regardless of your income!
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Old 04-17-2021, 08:55 AM   #14
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Originally Posted by jldavid47 View Post
I have put worksheet 1 from pub 915 into a spreadsheet to help me figure out how the taxability of social security is done. Basically, you need to compute your modified AGI which is 1/2 of your social security income plus the amounts from form 1040 lines 1, 2a, 2b, 3b, 4b, 5b, 7 and Schedule 1 line 9. The stuff you add in is basically wages, interest (including non-taxable interest), dividends, pensions, IRA distributions, capital gains. (It's a bit more complicated than that, but I can't put all of the IRS rules in a post).

For MFJ, if that number is less than $32000, none of your social security is taxable. If it is between $32000 and $44000 then half of it is taxable. If it is over $44000 then 85% is taxable. It social security was your only source of income (not likely) you and spouse could receive up to $64000 in social security benefits and not be taxed. The entire computation is quite complicated so if you really want to analyze your situation I'd recommend using a "what if" feature in a tax program or building a spreadsheet that incorporates Form 1040 and Worksheet 1 from publication 915. The former is easier, I use the latter but check it against my tax program for debugging purposes.
For the first time, I did my (90-year-old) dad's taxes. I had his 2019 return prepared by his paid preparer as a starting point. But with no RMD taken in 2020, they became very easy - zero tax liability, zero taxes withheld, a big nuthin!.

Part of doing my dad's taxes included creating a spreadsheet like my own but with a section which mimics the SS benefits worksheet like the one you described. Having his 2019 return acted as a check on my spreadsheet, so I could use it going forward to see what his 2021 taxes will be like (and save my dad another $150 due his tax preparer).

The what-if feature built into my spreadsheet also allows me to figure out what pct of his RMD should be withheld for taxes so he will have a tiny refund due (which can be forwarded into the following year, keeping things simple).
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Old 04-17-2021, 09:22 AM   #15
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If you'll forgive me for tooting my own horn, you may find this post to be of assistance.

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Old 04-17-2021, 09:35 AM   #16
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For the first time, I did my (90-year-old) dad's taxes. I had his 2019 return prepared by his paid preparer as a starting point. But with no RMD taken in 2020, they became very easy - zero tax liability, zero taxes withheld, a big nuthin!.

Part of doing my dad's taxes included creating a spreadsheet like my own but with a section which mimics the SS benefits worksheet like the one you described. Having his 2019 return acted as a check on my spreadsheet, so I could use it going forward to see what his 2021 taxes will be like (and save my dad another $150 due his tax preparer).

The what-if feature built into my spreadsheet also allows me to figure out what pct of his RMD should be withheld for taxes so he will have a tiny refund due (which can be forwarded into the following year, keeping things simple).
Did he even have a filing requirement for 2020? Most people with $0 liability don't have to file, so if this situation arises again, you can simplify further by not even doing a return for him. See IRS Pub 501 or use their little interview tool (https://www.irs.gov/help/ita/do-i-ne...e-a-tax-return) for the exact filing requirements.
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Old 04-17-2021, 09:54 AM   #17
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Did he even have a filing requirement for 2020? Most people with $0 liability don't have to file, so if this situation arises again, you can simplify further by not even doing a return for him. See IRS Pub 501 or use their little interview tool (https://www.irs.gov/help/ita/do-i-ne...e-a-tax-return) for the exact filing requirements.
Ain't that a kick in the head! I didn't even have to file for him for 2020. I doubt this will arise again because the RMD, suspended in 2020, will boost his income above the cutoff in 2021 to not have to file.

Thanks for posting it, even though it's a minor bummer. His state form (New York) I still have to file despite a similar zero-zero situation because there is a long-term care credit which is cumulative even if not taken (and not likely to ever get claimed, but still......).
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Old 04-17-2021, 11:11 AM   #18
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Unfairly, IMO. The parameters for when it's taxed have never been adjusted for inflation.
The second part isn't particularly relevant for most people who, with other income that they have, will have part of their SS taxable. What not indexing the threshold for inflation will do is to make more and more people subject to SS being taxable.

I think the most proper analogy for the taxation of SS is to a pension annuity or a non-deductible tIRA. If you go through the math of someone who makes annual contributions to a non-deductible IRA.

Try this: numerator = estimated SS taxes that you paid from your SS statement (middle of page 3) x 72% (not all SS is for retirement beenfits... some is for disability and survivor benefits)

denominator = your monthly FRA benefit * 12 * (age 82-FRA)... average age is 82 consistent with deferral crossover point

For me the result is 16%... so what I paid in in relation to my retirement benefits I can expect to receive is pretty close to the 15% that is excluded from tax.
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Old 04-17-2021, 06:28 PM   #19
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On the topic of SS taxes, there's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years, but most people aren't aware of this.

The SS formula for determining how much of your SS benefits are taxed is NOT indexed to inflation, so that threshold has not increased since it was first introduced in 1983. For a single person, if your income combined with half your SS benefits exceeds $25,000, you have to pay income tax on up to 50% of your SS benefits. If it exceeds $34,000, you have to pay income tax on up to 85% of your SS benefits. $25K in 1983 is worth a lot more than $25K in 2018. Since your retirement distributions and SS benefits will be adjusted with inflation, but NOT the $25,000/$34,000 thresholds, a greater percentage of your SS benefits will become taxable as each year passes (for married filing jointly, the thresholds are $32,000/$44,000.) It's a built-in tax increase, reducing "net" SS benefits, hurting seniors further. The greater your combined income and SS/2, the more you will be affected by this up to a max of 85% of your benefits being taxed! It's absurd, and those thresholds should be increased to reflect inflation since 1983.

The ways it is, you should play it safe by estimating that 85% of your SS benefits well into the future will be taxable. More information about this can be found in these references:

https://www.marketwatch.com/story/pe...xes-2019-01-07
https://www.fool.com/retirement/gene...-wreaking.aspx
http://www.foxnews.com/story/2007/03...-benefits.html
https://www.ssa.gov/policy/docs/issu...ip2015-02.html

I'm not one to support tax increases, but I would be open to paying higher FICA taxes to help shore up SS to prevent cuts to benefits and to prevent increasing the FTA for people within a decade of collecting SS.

At some point, the FTA will need increased for younger workers also as lifetime durations increase over time.

There was a bill introduced to address the problem of SS benefit taxation threshold levels to some degree, but it still wouldn't index it to inflation going forward. It doesn't look likes it's gone anywhere since it was last mentioned here.

https://www.congress.gov/bill/116th-...house-bill/860
https://larson.house.gov/sites/larso...019%200918.pdf
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Old 04-18-2021, 12:37 AM   #20
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On the topic of SS taxes, there's a flaw in how taxes are calculated for Social Security benefits that results in after-tax "net" SS benefits being "cut" every year and have been for years
Congress may not consider that a flaw....
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