Almost everyone has heard about Social Security. Social Security is a social welfare and insurance plan managed by the U.S. Federal Government that pays benefits to retirees, workers who become disabled, and survivors of deceased workers. There are different ways to become eligible for Social Security benefits, but the majority of people that claim Social Security are retirees. You must be at least 62 years old to claim retiree benefits, and the amount of income you receive is based on your income during your lifetime.
Now what some people may not know is that Social Security benefits are taxed differently for different groups of people. There are three tax brackets for the taxation of Social Security benefits. There is 0% taxation, 50% taxation, and 85% taxation. No matter what, at least 15% of your Social Security benefits will be received tax-free.
The amount of taxation on your Social Security benefits is based on your modified adjusted gross income, or combined income. The formula for determining your modified adjusted gross income is the following:
Combined income = Adjusted gross income + nontaxable interest + ½ of Social Security benefits
Your combined income will determine the amount of taxation on your benefits. The following table applies for taxation of Social Security benefits based on your tax filing status:
|Filing Status||Combined Income||Percentage of Benefits Taxed|
|Single||Less than $25,000||0%|
|Single||$25,000 - $34,000||50%|
|Single||More than $34,000||85%|
|Married Filing Joint||Less than $32,000||0%|
|Married Filing Joint||$32,000 - $44,000||50%|
|Married Filing Joint||More than $44,000||85%|
Hopefully this article has helped with your understanding of how Social Security benefits are taxed. Paying taxes in an important part of your financial plan and being fully informed on where your tax dollars are going helps to ensure that you have the most effective financial strategy possible. If you have any questions in regards to this article, feel free to give us a call!