Taxes and Social Security Benefits

A recent reader asked me to write on the taxation of Social Security benefits, so here goes.  Social Security can be non taxed or partially taxed based upon their income in that year.  The IRS calculation is based upon one’s Provisional Income and includes 1) Adjusted gross income (AGI) without the Social Security income, plus 2) one-half of their Social Security income + tax-exempt bond interest.

The first step is to see if Social Security income is taxed by comparing Provisional Income to the attached table.  As an example if we have a married couple who’s Provisional Income is $74,000, then 85% of $30,000 ($74,000 – $44,000) will be subject to their Marginal Tax Rate.  NOTE:  Only the amount over the threshold is subject to tax.

Example:  Joe & Darlene have a gross income of $64,000 and they receive $20,000 in Social Security income.

Non Accountant Rule of Thumb I would figure that 85% of Social Security benefits for my clients would be taxable (Marginal Tax Rate)

Low Income Retirees

As mentioned above, most clients will pay income taxes on 85% of whatever their Social Security benefits are, but low income retirees may find that a couple of extra dollars could cause their Social Security benefits to be taxed should their Provisional Income exceed $25,000 for a single or $32,000 for a married filing jointly.  At that point 50% of their Social Security benefits will be subject to taxation and if their Provisional income exceeds $34,000 for a single or $44,000 married filing jointly then the 85% subject to taxes comes into play!

Pro Active Tax Planning

Instead of claiming Social Security prior to age 70 it might make more sense to start drawing down on Qualified Retirement Plans in your 60’s prior to forced RMD withdraws at 70 ½.  This is especially true if you or your spouse are healthy and longevity runs in either family.  With a stock market at all time highs and relatively non existent interest rates, delaying claiming Social Security might prove the most prudent course.  With a Presidential Election in 2020 and the talk of eliminating the Trump Tax Cuts and Free Stuff for all it might make sense to take advantage of today’s relatively low tax brackets.  I remember back in 1975 when I started work as a Financial Advisor the top Federal tax bracket was 50% on earned income and 70% on unearned income!  Another words “Don’t waste a 20 – 25% tax bracket”.

Roth IRA’s

You’ll notice in the computation of Provisional Income that ROTH IRA’s withdraws are not added to the calculation, but tax free bond income is.

Have a Most Excellent Summer!


Live in a constant state of contentment!

Dave Zander, CFP®