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The IRS and Some States Tax Social Security Benefits

Edward Zurndorfer explains how much the IRS taxes Social Security retirement benefits and which states also tax Social Security retirement benefits

Edward A. Zurndorfer

Most federal employees and uniformed services members know that Social Security or FICA (Federal Insurance Contribution Act) tax is deducted from their salaries each pay date. Once they retire and start receiving their Social Security retirement benefits, they will receive their lifetime-paid FICA taxes back, plus more. But not every employee and uniformed service member is aware that the IRS and some states tax Social Security retirement benefits. This column discusses how much the IRS taxes Social Security retirement benefits and which states also tax Social Security retirement benefits.

Step 1: Calculating An Individual’s “Combined Income”

The first step in determining whether an individual’s Social Security benefits are taxable is to determine the individual’s combined income. An individual’s combined income is calculated by adding: (1) the individual’s adjusted gross income (AGI); plus (2) the individual’s nontaxable interest and tax-exempt dividends; and (3) 50 percent of the individual’s Social Security benefits.

An individual’s AGI includes the individual’s total gross income minus certain deductions such as interest from qualified savings bonds, foreign earned income or foreign housing, and employer-provided adoption benefits.

For a married couple in which each spouse is receiving a Social Security benefit, the combined income is computed separately for each spouse and then totaled together as a basis for determining the taxable amount of the Social Security benefits paid to each spouse.

Step 2: Computing the Taxable Portion of Social Security Benefits

The Social Security Administration sets the following thresholds when calculating how much of an individual’s Social Security benefits are taxed. These withholdings are based on the individual’s combined income (computed as shown above) and tax filing status, as shown in the following table:

Taxation Level Married Filing Jointly Married Filing Separately All Other Tax Filing Statuses
0 percent Under $32,000 Not Applicable Under $25,000
Up to 50 percent $32,000 – $44,000 Not Applicable $25,000 – $34,000
Up to 85 percent More than $44,000 Any Amount More than $34,000

Note: Married filing separately column assumes an individual lived with his or her spouse at any point during the year. If this is not true, then refer to the “all other tax filing statuses” column.

The table shows that any individual or married couple whose combined income falls into the “0 percent” taxation level does not have to pay taxes on his or her Social Security benefits. But anyone whose combined income is above the zero percent level will pay federal income tax on some of their Social Security benefits as discussed below.

Although an individual could owe taxes on up to 50 percent or 85 percent of his or her Social Security benefits, this does not mean he or she will actually owe taxes on that amount of benefits. If the individual falls into the “50 percent taxation” range, the IRS says that person should owe federal income tax on the lesser of half of the individual’s Social Security benefits, or half of the difference between the person’s “combined income” and the taxation threshold set by the IRS for the individual’s tax filing status. The following table summarizes the computation of the taxable portion of Social Security benefits:

Computing the Taxable Portion of Social Security Benefits

Combined Income Taxable Social Security Benefits
Single, Head of Household, Qualifying Widow(er)
$25,000 or less No taxable Social Security benefits
$25,001 – $34,000 Lesser of:
(1) 50% of Social Security benefits, or (2) 50% of provisional income above $25,000
More than $34,000 Lesser of: (1) 85% of Social Security benefits or (2) 85% of provisional income above $34,000 plus lesser of: (a) $4,500, or (b) 50% of Social Security benefits
Married Filing Joint Return
$32,000 or lessNo taxable Social Security Benefits
$32,001-44,000 Lesser of: (1) 50% of Social Security benefits, or
(2) 50% of combined income above $32,000
More than $44,000 Lesser of: (1) 85% of Social Security benefits or (2) 85% of combined income above $44,000 plus lesser of: (a) $6,000, or (b) 50 % of Social Security benefits
Married Filing Separate1 (any amount) Lesser of: 85% of Social Security benefits or 85% of combined income.

1 Assumes taxpayer lived with spouse at any time during the year. If the taxpayer did not live with his or her spouse at any time during the year, compute the taxable portion as though the individual was single.

The following worksheet can be used to calculate the taxable portion of Social Security benefits:

Federal Taxation of Social Security Benefits

1. Total Social Security (SS) benefits received …………………………..$__________

2. 50% of SS benefits (0.5 of Line 1) …….……………………………………$__________

3. Adjusted gross income without SS benefits ……………………………$­­­­­__________

4. Add: Exempt income

       a. Tax exempt interest and dividends

       b. Excluded qualified U.S. savings bond interest (Form 8815)

       c. Excluded foreign earned income or housing (Form 2555/2555-EZ)

       d. Certain income of bona fide residents of American Samoa (Form 4563) and

           Puerto Rico

       e. Excluded employer-provided adoption benefits (Form 8839)

       f. Student loan interest deducted

       g. Tuition and related expenses deduction (after 12/31/02) Total line 4

……….$________

5. Combined income (line 2 + line 3 +line 4) …………………………….$__________

6. Base amount 1 (status: A. $44,000, B. 0, C. $34,000) ………..……. $__________

7. Base amount 2 (status: A. $32,000, B. 0, C. $25,000)…….………..$__________

8. 50% of (line 5 – line 7) (not less than $0)……………………………..$__________

9. 50% of (line 6 – line 7)……………………………………………………….$__________

10. Taxable SS under 85% Rule (smallest of line 2, line 8 or line 9….$_____

11. Taxable SS under 85% Rule 85% of (line 5 – line 6) (not less than 0)

…………….….$_________

12. Sum of line 10 and line 11 …………………………………………………$__________

13. 85% of SS benefits (0.85 of line 1) …………………………………….$__________

14. Total taxable SS benefits (smaller of line 12 or line 13)……….$__________

The following example illustrates:

Frank and Amanda are a married couple, each age 67, and are filing a joint tax return for 2019. In January 2020, Frank received a 2019 Form 1099-SSA showing net benefits of $18,500 in box 5. Amanda received a 2019 Form 1099-SSA showing net benefits of $12,500 in box 5. Frank also received a taxable FERS annuity of $25,000 while they together received a total of $6,000 in interest and dividend income during 2019. Frank and Amanda determine the taxable portion of their Social Security benefits using the worksheet:

1. Total Social Security (SS) benefits received ……………..……………… $31,000

2. 50% of SSA benefits (0.5 of Line 1) …………………………..……………….$15,500

3. Adjusted gross income without SS benefits ………………………………$31,000

4. Add: Exempt income

       a. Tax exempt interest and dividends

       b. Excluded qualified U.S. savings bond interest (Form 8815)

       c. Excluded foreign earned income or housing (Form 2555/2555-EZ)

       d. Certain income of bona fide residents of American Samoa (Form 4563) and Puerto Rico

       e. Excluded employer-provided adoption benefits (Form 8839)

       f. Student loan interest deducted

       g. Tuition and related expenses deduction (after 12/31/02)   Total line 4

………$0

5. Combined income (line 2 + line 3 +line 4) …………………………..………$46,500

6. Base amount 1 (status: A. $44,000, B. 0, C. $34,000) …..…………..……. $44,000

7. Base amount 2 (status: A. $32,000, B. 0, C. $25,000….……………………..$32,000

8. 50% of (line 5 – line 7) (not less than 0) ……………………………………..….$7,250

9. 50% of (line 6 – line 7)……………..……………………………………………………$6,000

10. Taxable SS under 85% Rule (smallest of line 2, line 8 or line 9) …….$6,000

11. Taxable SS under 85% Rule 85% (line 5 – line 6) (not less than 0)

…………………..$2,125

12. Sum of line 10 and line 11 …………………………………………………………$8,125

13. 85% of SS benefits (0.85 of line 1) ……………………………………………..$26,350

14. Total taxable SS benefits (smaller of line 12 or line 13).……….……..$8,125

Frank and Amanda will, therefore, include $8,125 of their Social Security benefits in their 2019 gross income that is subject to federal income tax.

Those individuals who owe federal income taxes on their Social Security benefits may either make quarterly federal estimated income tax payments to the IRS or request that the IRS withhold federal income taxes from their Social Security benefits checks. Having one’s federal taxes automatically withheld may be the smarter move if the individual does not want to calculate how much has to be paid each quarter in estimated taxes.

Some States Tax Social Security Benefits

The following 13 states tax Social Security benefits:

Colorado
Connecticut
Kansas
Minnesota
Missouri
Montana
Nebraska
New Mexico
North Dakota
Rhode Island
Utah
Vermont
West Virginia  

Each of these states has its own formulas as to how they tax Social Security benefits.

    Edward A. Zurndorfer is a Certified Financial Planner, Chartered Life Underwriter, Chartered Financial Consultant, Chartered Federal Employee Benefits Consultant, Certified Employees Benefits Specialist and IRS Enrolled Agent in Silver Spring, MD. Tax planning, Federal employee benefits, retirement and insurance consulting services offered through EZ Accounting and Financial Services, and EZ Federal Benefits Seminars, located at 833 Bromley Street – Suite A, Silver Spring, MD 20902-3019 and telephone number 301-681-1652. Raymond James is not affiliated with and does not endorse the opinions or services of Edward A. Zurndorfer or EZ Accounting and Financial Services. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. While the employees of Serving Those Who Serve are familiar with the tax provisions of the issues presented herein, as Financial Advisors of RJFS, we are not qualified to render advice on tax or legal matters. You should discuss tax or legal matters with the appropriate professional.