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Will Your Social Security Benefits Be Taxed?

Who Pays Taxes on Benefits?

An estimated 14.5 million Social Security beneficiaries, nearly one-third, paid taxes on their benefits in 2000 because they had incomes above designated thresholds.

In general, beneficiaries with "combined income" above $25,000 for a single individual,and $32,000 for a married couple filing jointly have to pay taxes on their benefits.

The portion of benefits that is taxable depends on "combined income," i.e., the total of one-half of benefits plus other income. (See p. 2, lines 3, 4, and 6.)

  • If the beneficiary files a federal tax return as an individual, and has a combined income between $25,000 and $34,000, or the beneficiary and spouse file a joint return and have a combined income between $32,000 and $44,000, then the amount of benefits subject to tax is the lesser of:
    1. 50 percent of the Social Security benefit amount or
    2. 50 percent of income over the first "threshold." (See lines 8 through 18 on the worksheet.)
  • If the beneficiary files a federal tax return as an individual, and has a combined income over $34,000, or the beneficiary and spouse file a joint return and have a combined income over $44,000, the amount of benefits subject to tax is the lesser of:
    1. 85 percent of the Social Security benefit amount or
    2. 85 percent of income over the second threshold, plus the smaller of
      1. $4,500 (single), $6,000 (couple) or
      2. 50 percent of the Social Security benefit amount. (See lines 12 through 18 on the worksheet.)

Where Does the Money Go?

Beginning in 1984, up to one-half of an individual's or couple's Social Security benefit was subject to income tax. Revenues raised from this first tier (taxation of up to 50 percent of benefits) are allocated back to the OASDI trust funds.

After 1993, the maximum percentage of benefits subject to tax was increased from 50 to 85 percent. Revenues raised from this second tier of taxation (from 50 to 85 percent of benefits) are allocated back to the Hospital Insurance trust fund (Medicare).

Will My Benefits Be Taxed?

On the following page is a worksheet with side-by-side examples. The first example is a single filer with $5,980 from Social Security and $28,990 in other income. The second example is a couple filing jointly with $5,600 from Social Security and $29,750 in other income. The blank column is for you to use to estimate whether and how taxation of Social Security benefits applies in your case.

Click here to see Worksheet for Estimating the Taxable Portion of Your Social Security Benefit.)

Footnotes

  1. Social Security beneficiaries include those who receive Old Age, Survivors and Disability Insurance (OASDI) benefits.
  2. Source: U.S. House of Representatives Committee on Ways and Means, 2000 Green Book, p. 65.
  3. On the 1040 tax return, "combined income" is the sum of adjusted gross income plus nontaxable interest plus one-half of the Social Security benefit amount. (See lines 1-7 on the worksheet.)
  4. Head of household and qualifying widow(er).
  5. The dollar amounts of $4,500 and $6,000 represent 50 percent of the difference between the $25,000 and $34,000 threshold, and 50 percent of the difference between the $32,000 and $44,000 threshold respectively.

Written by Laurel Beedon and Alison Shelton, AARP Public Policy Institute
August 2001
©2001 AARP
May be copied only for noncommercial purposes and with attribution; permission required for all other purposes.
Public Policy Institute, AARP, 601 E Street, NW, Washington, DC 20049

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