How To Determine If Your Social Security Retirement Benefits Are Taxed

Up to 85% of your Social Security benefits after you retire may be taxed. Here's how to find out how much of your income is taxed and what you can do to lower or get rid of any tax.

Among all the money problems that come with being an older person, the fact that Social Security retirement benefits may be taxed is the one that makes people the most angry. From what I've seen, I know that some seniors have no idea about this. I've also had to sit and listen to people who know what's going on rant. It kind of goes like this: "I already paid taxes on the money I made when I worked. Each time I got paid, Social Security was taken out of my money. This was a tax. It seems like this is a tax on a tax." And still more...

After giving the person a chance to vent, I would usually say, "Hey, don't kill the person who told you! I'm here to find out if any of your Social Security benefits are taxed, if so, how much, and what we can do to lower or get rid of that tax." So let me tell you what we talked about in the first part of our talk.

Whether you pay taxes or not depends on:

1. How much money you make.
2. If you get money from sources other than Social Security or not.

How much you pay in taxes depends on:

1. Your filing status, which is either "single" or "married."
2. How much money you make.

In 1983, a tax began to be taken out of Social Security retirement benefits. Up to half of the benefits were subject to tax. In 1993, this number went up to 85%. Here's how to figure it out...

The first thing you need to do is figure out your "provisional income." So get your tax return from last year.

1. Add any tax exempt interest (line 8b).
2. Your "provisional income" is the number you get.
3. Add half of your total Social Security benefits (line 20a).
4. Take your taxable Social Security benefits (line 20b) out of your Adjusted Gross Income (line 37).

You can use the rules to figure out how much of your Social Security is taxed once you know this number. Again, this depends on your marital status and how much money you make.

First, let's look at a married couple who files together. The math is as follows...

1. If your tax-free income is more than $32,000:
2. You don't have to worry if your provisional income is less than $32,000.

a. Divide by two the amount of provisional income between $32,000 and $44,000.

b. If your provisional income is more than $44,000, take the total amount of your provisional income, take $44,000 off of it, and multiply that number by 0.85.

c. Add 2a and 2b.

d. Multiply your total benefits from Social Security (line 20a) by 0.85.

e. The amount of your S.S. benefit that is taxed is the less of what you got for 2c and 2e.

Now let's look at how to figure out the cost for one person...

1. None of your Social Security benefits are taxed if your provisional income is less than $25,000.
2. If your temporary income is more than $25,000:

a. Divide by two the amount of provisional income between $34,000 and $25,000.

b. If your provisional income is more than $34,000, take $34,000 off the total amount of your provisional income and multiply that number by 0.85.

c. Add 2a and 2b.

d. Times your total Social Security benefit (line 20) by 0.85.

e. The amount of your S.S. benefit that is taxed is the less of what you got for 2c and 2d.

Now that you know if any of your Social Security benefits are taxed and, if so, how much, you should look into ways to lower or get rid of this tax. In general, solutions fall into three groups:

1. Cut back on the dividends you get.
2. Cut your interest income that isn't taxed.
3. Cut down on the interest you get. Most of the time, it's interest on CDs.

Note: The above calculations are very easy to understand. There may be other parts of your situation that change the math. It is highly recommended that you talk to a qualified tax expert.