Are Social Security Benefits Taxable? This is How it Works. - Cravitz Financial & Insurance Solutions

Are Social Security Benefits Taxable? This is How it Works.

If your only source of income comes from Social Security you will not have pay any federal taxes. However, if you have other income such as a pension or a withdrawal from an IRA or 401(k) for instance, you may very well have to pay taxes. To determine whether your Social Security is taxable or not you need to determine your provisional income first. In this video, I will explain how to calculate provisional income, and share some examples of how your other income could make your Social Security benefits taxable. Depending on how much other income you have, you may have to pay taxes on up to 85% of your Social Security benefits.

There are 13 states I am aware of that tax Social Security. They all have different rules as to how it works in the particular state. If you live in any of the following states I suggest you make sure you understand how it works in your state: Colorado, Connecticut, Kansas, Minnesota, Missouri, Montana, Nebraska, New Mexico, North Dakota, Rhode Island, Utah, Vermont, West Virginia.

Full Transcript:

What's going on, everybody? It's Ryan here. Okay. So are your Social Security benefits taxable to you? Well, the short answer is, is that it depends. The slightly longer answer is, is that it depends upon where your other income comes from. So in a few short moments, I'm going to share my screen with you. I'm going to walk you through a spreadsheet here and explain how it all works.

But real quick, before I do it, let me just say a few things about the history of taxation with Social Security. It used to be, prior to 1983, you did not have to pay any taxes on your Social Security. Then in 1983, a law was passed that made it so that up to 50% of your Social Security benefits could be taxable. And then 10 years later, in 1993, they made it so that up to 85% of your Social Security benefits could be taxable.

So that's where it stands today. You're either going to pay taxes on 0% of your Social Security benefits or 85% of your Social Security benefits or something in between. Again, it depends upon where your other income comes from.

Now, how do we figure this? Well, we've got to figure out what's called provisional income, and I'll walk you through it on the spreadsheet here. But provisional income, by the way, is also known as combined income. Social Security tends to call it combined income, but that's how we're able to figure out whether your Social Security benefits are going to be taxable.

So with no further ado, let me go ahead and share my screen here with you. And what we've got here is a... It's a pretty comprehensive spreadsheet. What I want you to do, just for now anyways, is to focus on the left side of my screen. In fact, let me scroll down here to this section so that we can explain how Social Security taxation works.

All right. So I've got a real basic example. Actually, let me come back up. Real basic example. This is a single person and they are over 65 years old and their income is $30,000 from Social Security. They have no other sources of income; no pensions, no IRA withdrawals, nothing. Just the Social Security. Okay?

So the way that we determine whether these benefits are going to be taxable, again, we have to figure out what the provisional income is. And in order to figure out what their provisional income is, what we do is that we take half of their Social Security benefit and then we add in pretty much all the rest of their other income. So it includes dividends, capital gains, pension income, IRA withdrawals.

It even includes tax-free interest for municipal bonds, which is often overlooked because those are tax-free, but it does affect the taxation on your Social Security. So that's what we do. Add half of your Social Security, add all the rest of the other income, and then we can figure what your provisional income number is.

Now, once we know what your provisional income number is, in this case it's 15,000, because this is a real simple example. It's only half of their Social Security. There's no other income. We have the 15,000, we then run this through the taxable Social Security calculation chart here. And this is for a single person, again. And what we can see is that on the first $25,000 of provisional income, that income is taxed at 0%. So it's not taxed. So in this person's case, none of their Social Security benefits is subject to taxation. They don't pay any income taxes whatsoever.

Now where it gets a little tricky, again, is it depends on what your other income is. Now, if you have money coming from, let's say, a Roth IRA, and you take that money out in the form of a qualified distribution, you won't have to pay any taxes on the Roth IRA. Not only that, but it doesn't affect your Social Security taxation.

So I talk a lot about Roth IRAs on other videos. There's a lot of great benefits about them because, literally, if you had a million dollars in a Roth IRA, you could take a full withdrawal out of there and, as long as it's qualified distribution, not have to pay any taxes on that, and it still doesn't affect the taxation of your Social Security benefits.

So Roth IRAs are great, but let's say that you're taking money out of an IRA or a 401k, or you've got a pension or something like that that is taxable. That will all affect your Social Security benefits, or the taxation on your Social Security benefits.

So let me just give a real simple example there. Let me add... Let's say this person has an additional $30,000 of income. Woops, that's 3000, one more zero. There it is. All right. And let's come back down here. So their total income is 30,000 from Social Security and maybe that's just the pension or something like that. It could even be the IRA withdrawal, it wouldn't matter, but they've got $60,000 here.

And again, what do we do? We take half the Social Security, which is 15,000 in this case, add in the other income, 30,000, we have 45,000. Provisional income, now, is 45,000. We've got to run that through the tax chart. Or, well, this chart here. And so the first 25,000, and none of that's going to be subject to tax. And then on the amount between 25 and 34,000, half of that will be subject to tax. So between 25 and 34 is $9,000. Half of that is 4,500. And that's that figure right here.

And then we've got to look at how much they have above $34,000. And in this case, they have... Coming back over here, they have $45,000. So they have $11,000, between 34 and 45, $11,000 over that threshold. So take $11,000, multiply it by 85% over here, and you'll get $9,350. Add these two numbers together, we get a total provisional income amount of $13,850. So that's their provisional income. That's the amount that they have to pay taxes on, that's subject to taxes.

So what do we look at next is we look at, "Okay, so how does all this play out?" Well, here's their income. They've got Social Security for 30,000. They've got their income number for a hundred. And we've already figured out the provisional income. We figured out the Social Security, the amount of the Social Security that's subject to tax. Again, is down here, the 13,850. And we can see that right over here. Here's their taxable Social Security.

So we add that to the income from the pension, let's say it's from. 30,000 plus the 13,850 is $43,850. But then let's say they take the standard deduction. They now have $29,800 that's going to be subject to taxes. And after running that through the tax charts, they would owe $3,379 on the federal level. Everything I'm talking about here is just on the federal level, not state, because every state has different rules. So that's how that would work in that scenario.

Now let's take a look at a married couple. So a married couple, let's just say they're over 65, also, in my example here. And instead of 30,000, maybe their total Social Security income combined is 50,000.

And let's say they have no other income. All they have is the... Let me change that down there. And all they have is just Social Security, and their Social Security income is $50,000. So if they're married, filing jointly, it works the same way in order to determine the provisional income. We just take half of their Social Security. In this case, it was 50,000. Half of that is 25,000. So that's their provisional income number. And then here's the tax chart for provisional income for married people.

And it's not until you get to about 32,000 where any of your Social Security benefits could be subject to taxation. So for these folks, that are underneath that, they would not owe any taxes on their Social Security whatsoever. But again, let's say that they had other income. And let's just say... Let's say they have 70,000 living on 120,000 total, let's say, between Social Security and their income.

So now let's figure it out. Half of the Social Security is 25,000, add in their other income is 70,000. Their total provisional income is 95,000. Run 95,000 through the chart here. Again, the first $32,000 is not taxable. The amount between 32 and 44,000 is taxed at 50%. So $6,000 there is going to be subject to taxation.

And then we got to look at how much is above the $44,000 number. So, in their case, they're at 95,000. So what is that? It's 51,000, right? So it's 51,000 above the threshold here, times 85% is $43,350. Add these two numbers together and we get 49,350.

Now what's interesting about this is that when we do the calculation, we would think, initially, that they would owe taxes... On stuff that they would owe, they would have to... Or that $49,350 of their Social Security benefits are subject to tax. But remember that there's a maximum. The maximum is 85%. So in their case they would only have to pay taxes on $42,500 of Social Security income.

So if we go over here again and take a look at what their total taxes would look like when we combine their two different income sources here, we take their Social Security, and also could be a pension income. This could be an IRA withdrawal, 401k withdrawal. Again, it doesn't matter. But we have to take this $70,000 number, add that to the amount that's subject to taxation, which is 42,500. So 70,000 plus 42,500 is 112,500. So that's their income before their deduction. So after their standard deductions they have a taxable income of 85,100, and would have taxes of 10,302.

Now, understand, I'm not even including Medicare or anything like that into the mix, which would be down over here in this part. I really just wanted to focus on the Social Security part here for you, so you can understand how the provisional-income formula works, and a little bit about how it interacts with your other income sources as well.

So, hope this was helpful. I do hope it all made sense. If it didn't or if you have questions, let me know. Talk to you soon.


500 N. State College Ste 1100
Orange, CA. 92868

Investment advisory services offered through Brookstone Capital Management, LLC (BCM), a registered investment advisor. BCM and Cravitz Financial & Insurance Solutions are independent of each other. The content of this website is provided for informational purposes only and is not a solicitation or recommendation of any investment strategy. Investments and/or investment strategies involve risk including the possible loss of principal. There is no assurance that any investment strategy will achieve its objectives. Registered Investment Advisors and Investment Advisor Representatives act as fiduciaries for all of our investment management clients. We have an obligation to act in the best interests of our clients and to make full disclosure of any conflicts of interest, if any exist. Please refer to our firm brochure, the ADV 2A item 4, for additional information. Information provided is not intended as tax or legal advice, and should not be relied on as such. You are encouraged to seek tax or legal advice from an independent professional.  Insurance products and services are not offered through BCM but are offered and sold through individually licensed and appointed agents.  CA Insurance License #0C86000.

Any comments regarding safe and secure investments, and guaranteed income streams refer only to fixed insurance products. They do not refer, in any way to securities or investment advisory products. Fixed Insurance and Annuity product guarantees are subject to the claims-paying ability of the issuing company and are not offered by Brookstone Capital Management. Index or fixed annuities are not designed for short term investments and may be subject to caps, restrictions, fees and surrender charges as described in the annuity contract. Ryan Cravitz and/or Cravitz Financial and Insurance Solutions are not affiliated with or endorsed by the Social Administration or any other government agency.

Copyright © 2024 Cravitz Financial & Insurance Solutions | | Privacy Policy