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Are Your Social Security Benefits Taxable?

Millions rely on Social Security to make ends meet in retirement. But few know that you can actually have to pay tax on your Social Security benefits under certain circumstances.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, runs through the rules governing whether Social Security benefits are taxable. He notes that the first key is to calculate your investment income and taxable distributions from retirement plans, and then add in half your Social Security benefits. If the resulting figure is above $25,000 for single taxpayers or $32,000 for joint filers, then up to half of your benefits could be taxable. For singles above $34,000 or joint filers above $44,000, up to 85% of benefits can be taxable. Dan concludes by noting that investors in tax-free municipal bonds are often surprised to find that they must add in their income for purposes of the Social Security tax question, making investments in iShares AMT-Free National Muni (NYSEMKT: MUB  ) and similar tax-free vehicles lose some of their appeal.

Make the most of Social Security
Taxable or not, Social Security benefits are essential, and you have to make sure you get every penny you're entitled to. In our brand-new free report, "Make Social Security Work Harder for You," our retirement experts give their insight on making the key decisions that will help ensure a more comfortable retirement for you and your family. Click here to get your copy today.


Read/Post Comments (15) | Recommend This Article (32)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On January 19, 2014, at 11:03 AM, rja444 wrote:

    Dam right I am entitled to it, I paid into for 50 years. Time for the government to pay up.

  • Report this Comment On January 19, 2014, at 11:40 AM, sogole wrote:

    Well folks in Washington just remember"If the price of my success is my integrity,the price is to high".

  • Report this Comment On January 19, 2014, at 11:44 AM, syzygysyzygy wrote:

    regardless of all these so called "experts" you should always take soc sec as soon as you can

    why? because you cant trust this immoral government one inch

    take the $$$ and run

  • Report this Comment On January 19, 2014, at 12:50 PM, CraigR wrote:

    Basic IRS forms have a worksheet to determine this amount. And yes, a larger portion should be taxable if you have alternate sources of income. Soc Security was meant to be a minimum "survival" income-not a replacement for you to continue your lifestyle. If you save and invest correctly, you won't need SS to maintain that life.

    And for the argument that you paid for it so you want to get back what you put in-that pretty much happens in less than 10 years which is why it will bankrupt the U.S.

  • Report this Comment On January 19, 2014, at 1:01 PM, bkmobal wrote:

    Hate to tell you but Social Security is not guareented and can be changed at any time by Congress. The case that lets them do it is Supreme Court case Nestor vs Fleming and is posted at the Social Security website. Case is from 1962

  • Report this Comment On January 19, 2014, at 1:43 PM, redape wrote:

    "If the resulting figure is above $25,000 for single taxpayers or $32,000 for joint filers, then up to half of your benefits could be taxable. For singles above $34,000 or joint filers above $44,000, up to 85% of benefits can be taxable."

    Can this be right? Is there a magic threshold point in which you suddenly have half your benefits taken away?

    Or are you simply taxed on the amounts above that $25,000 income? And secondly, is this a 100% penalty tax, or is there a percentage tax rate?

    Let's say that you receive $12,500 in SS and $12,501 from other income sources. Does that mean you go from having zero SS taxed to having 50% of that SS taxed (i.e. $6,250). And the more dependent you are on SS you are the greater the amount subject to the tax!!!

    Or are you taxed on the $1 you are over?

    And what's the tax rate? Is it the rate for income at $25,000? Just as any other tax-payer or is is vastly more?

    Your statement hardly clarifies things for retirees at all.

  • Report this Comment On January 19, 2014, at 2:12 PM, MCCrockett wrote:

    If your income exceeded Social Security's income threshold in all years used to calculate your benefit, you are guaranteed to pay tax on 85% of the benefit if you claim your benefit at full retirement age or later.

    If you had viewed retirement as an income stream problem with retirement savings only being used when the income from Social Security and pensions fell short, it's a shock to discover that you have to withdraw from retirement savings simply to pay income taxes.

  • Report this Comment On January 19, 2014, at 2:40 PM, MCCrockett wrote:

    @redtape, if half your total Social Security benefit income plus income from other sources exceeds the thresholds, either 50% or 85% of your Social Security benefit income will be taxed as ordinary income.

    The "tax bite" on 50% or 85% of your Social Security benefits depends on the amount of income you have from other sources.

    If you worked any time during the year in which you claimed your Social Security benefits, you will most likely have to pay taxes on a portion of your benefits.

  • Report this Comment On January 19, 2014, at 2:53 PM, Tim69 wrote:

    If that is the case, wouldn't it be better to invest in things outside of a structured plan, like buying silver and gold coins? That way if SS doesn't give you enough to live on you can barter with your coins.

  • Report this Comment On January 19, 2014, at 4:56 PM, Strausd22 wrote:

    I am not sure what the writer is totally true. If you wait until Full Retirement Age, your retirement income, pensions, IRRAs are not counted. I talked to a Social Security Representative last week, because I just reached full retirement age, and was told that, if I was still working, and decided to take social security, which is earned income from wages, a portion of that for social security purposes is taxable, however, at full retirement age, you can have all the pension, or investment income you want, and it was not counted and taxable against your social security benefits. If anyone is planning to start taking their social security benefits, I would strongly advise them to talk to a Social Security Representative, first.

  • Report this Comment On January 19, 2014, at 6:33 PM, MCCrockett wrote:

    @Strausd22, you're confusing two different issues: Reduction in benefits due to continued employment and federal income taxes on Social Security income.

    If you claim Social Security benefits before full retirement age, the amount of your benefit will be reduced by $1.00 for every $2.00 you earn in wages or salary over the limit set by Social Security. For 2014, the income limit is $15,480.

    The year that you reach full retirement age, the reduction changes to $1.00 for every $3.00 in earned income and the income limit is increased to $41,400 in 2014. The year after you reach full retirement age, there is no reduction in benefits if you continue to have earned income.

    Even when receiving a reduced Social Security benefit, you may be subject to federal income taxes on your benefit when half the value of your benefit plus income from all other sources that are not explicitly excluded exceeds the thresholds.

  • Report this Comment On January 19, 2014, at 10:58 PM, tshoema wrote:

    In the year you turn 66 (full retirement), you can earn up to $41,000, before SS starts taking back $1 for every $3 that you earn. When your reach your birthday, no penalty.

  • Report this Comment On January 20, 2014, at 9:13 AM, ohiodale wrote:

    Social security is a good program but it needs fixed. I think I wll get back more than I and my employer paid into the system. I also think if I would have been given the money my employer and I paid into the system and I would have invested it myself I would have easily over a million dollars. The way the current system works is current workers are paying the benefits of the retirees. Nothing wrong with this system but we need to increase the payroll tax by 1% to save SS. It is worth the extra 1% it you look at the benefit.

  • Report this Comment On January 20, 2014, at 2:34 PM, dotbear wrote:

    I may have missed something here, so forgive me if a similar issue has been covered.

    My husband and I generally make less than the $32,000 threshold for being taxed on our Social Security. It is our only income (hardship retirement for both of us - another story...)

    Last year, I received an extra $5000 due to an error in how my Social Security was calculated earlier. It was back pay for the error.

    This will cause us to make over $32,000. Here is my question...

    We have a lot of medical deductions. Can we use these on our tax form like we did when we were working? These deductions would cause our total income to fall below $32,000. Or does Social Security automatically take taxes out somehow?

    Comments from anyone who knows would be much appreciated. Thanks!

  • Report this Comment On January 21, 2014, at 7:39 AM, rj0967 wrote:

    Help me out here? So what if you're taxed 50% or even 85%, the rest is added income. If you are still working you are still paying in and when you really quit your benefit line should be higher. Two to five hundred more a month or more, after taxes is still a pretty sweet deal, right.

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Dan Caplinger
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Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

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