This article was updated on April 9, 2018, and originally published on June 6, 2016.
Depending on your income, up to 85% of your Social Security benefits may be taxable. There's a worksheet in IRS Publication 915 (link opens PDF) that can help determine whether your Social Security is subject to tax or not. However, the easiest way to figure it out is with a Social Security tax calculator, which can help you determine how much will be taxable at your marginal tax rate.
Are your Social Security benefits taxable?
If you didn't have significant income besides Social Security benefits, then the answer is typically no. Whether or not your benefits are taxable depends on your combined income, which is defined as your adjusted gross income (AGI) plus your nontaxable interest income and one-half of your Social Security benefits.
For your benefits to be taxable, your combined income must be greater than $25,000 if you're single or $32,000 if you're married and file jointly. Because only half of your Social Security income is considered, and the highest possible Social Security benefit is $44,376 per year, Social Security income by itself isn't ever enough to make a single filer to exceed the limit. And when it comes to married couples who file jointly, both spouses would need to be high earners for their combined Social Security benefit to exceed the threshold.
In a nutshell, if your Social Security is taxable, then it will probably be because you had substantial income other than your benefits. It's also worth mentioning that if you're married and file separately, then the income threshold is zero. This means your benefits will probably be taxable, regardless of income.
The calculation can be complicated
Depending on your income and filing status, up to 85% of your Social Security benefit can be taxable:
- If you're single, a combined income between $25,000 and $34,000 means that up to 50% of your benefits could be taxable. A combined income greater than $34,000 means that up to 85% of your benefits could be taxable. Of course, if your combined income is less than $25,000, none of your Social Security benefits are subject to tax, as I discussed in the previous section.
- If you're married and file a joint tax return, then a combined income between $32,000 and $44,000 puts you in the 50% taxable range, and income over $44,000 means that up to 85% of your benefits are taxable.
- If you're married and file separately, up to 85% of your benefits can be taxed, regardless of your income.
Notice that I said "up to" 50% or 85% of your benefits is taxable. It's not a simple of multiplication, and there are several variables that determine the actual amount of taxable Social Security benefits.
The formula to figure out how much of your Social Security income may be taxable is rather complicated, and you can see an example of it on page seven of IRS Publication 915. Or, better yet, if you have information about your other income, you can use a Social Security tax calculator to calculate this amount.
A Social Security tax calculator can help
Here's an excellent Social Security tax calculator. Not only can you input your Social Security benefits and other income to determine how much of your benefits are taxable, but if you know your marginal tax rate, or tax bracket, the calculator can give you a good estimate of how much your Social Security benefits can increase your tax bill.
The advantage of using this calculator to determine the potential tax implications of your Social Security benefits is that you can plan accordingly. You can have taxes withheld from your benefits at a rate of 7%, 10%, 15%, or 25% (you choose), or you can elect to make quarterly estimated tax payments based on how much you expect to owe.
While nobody enjoys paying taxes, having some of your benefits withheld, or paying the IRS every three months, is certainly better than getting hit with a big tax bill at the end of the year.