by Carolyn Rothwell on August 26, 2014

Calculating Taxable Social Security Benefits - Not as Easy as 0%, 50%, 85%


It is typical for social security benefits to be 85% taxable, especially for clients with higher income sources in retirement, but the benefit subject to taxation can be lower.  In college, my tax accounting professor let us off easy by hinting we only needed to know social security benefits would be 0% taxable for clients with income under $25,000, 50% taxable for clients with income below $44,000 and 85% for clients with income above $44,000 for an upcoming exam.  While I appreciated not having to memorize the details of the calculation, I still have to remind myself that it is not as simple as 0%, 50%, or 85%.  

The highest portion of social security benefits subject to taxes is 85%, while 0% is lowest, depending on your client’s provisional income.  The provisional income is the client’s adjusted gross income, plus tax-free interest, less social security benefits, plus one-half of social security benefits. 

  • Provisional income less than $25,000 ($32,000 for joint), no social security benefits will be taxable.  
  • Provisional income between $25,000 and $34,000 ($32,000 and $44,000 for joint), a maximum of 50% of social security benefits will be taxable.
  • For a client with provisional incomes over $34,000 ($44,000 for joint), a maximum of 85% of social security benefits will be taxable.

There are two calculations to determine the taxable Social Security.  Compute them both and use the smaller of the two.  

Method 1 – 85% of the SS benefit (maximum taxation)

  • This one is easy – social security benefit times .85 is the maximum amount of taxable benefits.

Method 2 – Provisional Income
Please note, this might not be the formal way of completing this calculation, but this is what works best for me to derive the right amount quickly.  Hopefully I don't offend any CPAs - but the math works :)

  • For clients with provisional income over $32,000 and under $44,000 (joint)
    • The provisional income between $32,000 and $44,000 (joint) is taxed according to the pre-93 rules at 50%
    • Provisional income - 32,000 x .5 = taxable social security
  • For clients with provisional income over $44,000 (joint)
    • A) The portion of income between $32,000 and $44,000 is taxed according to the pre-93 rules at 50%, amounting to $6,000 of taxable social security
      • $44,000-$32,000 = $12,000 x .5 = $6,000
    • B) The provisional income over $44,000 (joint) is taxed according to the post-93 rules at 85%
      • Provisional income - 44,000 x .85 = additional taxable social security
    • C)  Add pre-93 rules taxable social security of $6,000 (A) + additional amount of taxable social security for provisional income over $44,000 according to the post-93 rules (B) for the total taxable social security
      • (A) + (B) = total taxable social security

Silver makes the assumption that 85% of the social security benefit is taxable to be most conservative (and straightforward).  Easy Money allows the planner to set the percentage as either 0%, 50% or 85%.  Golden Years determines the amount of taxable social security each year, thanks to the detailed tax analysis built into the projections.  As a client’s provisional income changes, the amount of social security benefits subject to taxes can change too.  The amount that is determined to be taxable will display on the Social Security Worksheet (report D16) and be carried onto the Taxable Income Analysis, column 6 (report D7).

Let’s look at an example case and run through the calculations for a three years where the portion of social security subject to taxation varies from a low of 10% to a high of 85%, so you can see the 0%, 50%, 85% rules are not clear cut.

  • For age 65/67, social security benefits total $50,061, and the taxable portion is $19,372 (39%)
  • For age 68/70, social security benefits total $53,125, and the taxable portion is $5,574 (10%)
  • For age 71/73, social security benefits total $56,376, and the taxable portion is $47,920 (85%)

 SocialSecurityWorksheet

The amount of social security subject to taxation changes as the clients provisional income chances.  We can see the pieces that make up the clients provisional income on the Taxable Social Security Worksheet (D16).  The AGI included in Column 1 is already reduced by the social security amount.

Age 65/67
Social security benefits total $50,061, and the taxable portion is $19,372 (39%)

Method 1 = $42,552

  • $50,061 * .85 = $42,552

Method 2 = $19,372 

  • Provisional Income (PI) = $59,732 

AGI $32,714 reduced by SS + Tax Free Interest $1,987 + ½ SS $25,031

  • The clients provisional income is over $44,000
    A) PI between 32,000 and 44,000 x .5 = $6000
    B) (PI $59,732 – $44,000) x .85 = $13,372
    C) (A + B) = $19,372

Age 68/70
Social security benefits total $53,125, and the taxable portion is $5,574 (10%)

Method 1 = $45,156

  • $53,125 * .85 = $45,156

Method 2 = $5,574

  • Provisional Income (PI) = $43,149
    AGI $14,239 (reduced by SS) + Tax Free Interest $2,347+ ½ SS $26,563
  • The clients provisional income is between $32,000 and $44,000
    (PI $43,149 – $32,000) x .5 = $5,574

Age 71/73
Social security benefits total $56,376, and the taxable portion is $47,920 (85%)

Method 1 = $47,920

  • 56,376* .85 = $47,920

Method 2= $48,903

  • Provisional Income (PI) = $94,474
    AGI $63,514 (reduced by SS) + Tax Free Interest $2,772 + ½ SS $28,188
  • The clients provisional income is over $44,000
    A) PI between 32,000 and 44,000 x .5 = $6000
    B) (PI $94,474– $44,000) x .85 = $ 42,903
    C) (A + B) = $ 48,903

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Carolyn Rothwell

Carolyn enjoys spending her time building Money Tree Software's brand and products. Her experience creating and delivering financial plans for a full-service financial planning firm and supporting advisors working to provide the best planning to their clients as a Money Tree support member has provided an excellent understanding of the importance of financial planning.