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TAXES | Will You Have to Pay Tax on Social Security Benefits?

Some people are under the misconception that Social Security benefits are always free from federal income tax. However, depending on how much income you have from other sources, you may have to report up to 85% of your benefits as income on Form 1040 and pay the resulting federal income tax.

Your CPA will do all of the calculations for you, but it can be helpful to understand the theory behind the calculations. Here is how to find out if your Social Security benefits will be taxed.

Step 1: Figure Your Provisional Income

The amount of Social Security benefits that you must report as taxable income depends on your provisional income for the year. For most people, their provisional income is their adjusted gross income (AGI), which is the amount on the last line on Page 1 of your Form 1040, plus 50% of their Social Security benefits.

The full calculation includes AGI plus following amounts and is your "provisional income" for the year:

  1. Half (50%) of your Social Security benefits.

  2. Tax-free municipal bond interest income.

  3. Tax-free interest on U.S. Savings Bonds used to pay for qualified college expenses.

  4. Tax-free adoption assistance payments from your employer.

  5. The deduction for student loan interest.

  6. The write-off for higher education tuition and related fees.

  7. The domestic production activities deduction.

  8. Any other Page 1 write-offs that are separately entered on line 36 of Form 1040.

  9. Tax-free foreign earned income and housing allowances and certain tax-free income from Puerto Rico or U.S. possessions.

Step 2: Find Your Social Security Scenario

Once you know your provisional income, you can determine which of the following three scenarios you fall under:

  • Report 85% of Your Benefits as Income - If your provisional income is more than $44,000, and you file jointly with your spouse, you must report up to 85% of your Social Security benefits as income on Form 1040.

  • Report up to 50% of your Benefits as Income - If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, you must report up to 50% of your Social Security benefits as income.

  • 3. Report None of Your Benefits as Income - If your provisional income is $32,000 or less, and you file a joint tax return with your spouse, your Social Security benefits are federal-income-tax-free (but you might still owe state income tax).

As always, please consult with your tax advisor to determine how these rules affect your personal circumstances.

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