Is My Social Security Income Taxable?

Photo by Jan Roberg.

People often ask me if their Social Security income is taxable.  No, sorry, I just lied.  When I finish preparing  a tax return for someone on Social Security I’ll often hear, “What do you mean my Social Security is taxable? ”  People who say that are usually angry when they say it too.  But, for many people, Social Security is taxable.

So how do you tell if your Social Security is going to be taxed?  Here’s the quick and dirty way to figure it out.  First, take half of all of the Social Security income you get and add that to all of the other income you get.  If you’re single and the amount is over $25,000 you’ll start getting hit with tax.  If you’re married filing jointly—then you’ll start getting hit at $32,000.  If you’re married-filing separately and don’t live apart—then it’s all taxable.

So this can totally mess up your tax rates.  For example—let’s say you ‘re currently in the 15% tax bracket and you haven’t crossed into “Taxable Social Security Land” yet, but you’re right on the border.  You want to take a really nice vacation and it’s going to cost you $10,000.  How much money do you need to take out of your IRA to go on vacation and pay the income tax?

Well, you know you need 15% more for the tax so let’s say you take out $12,000.

$12,000 X 15% = 1800

That means that you’ll have $10,200 for your vacation, right?  (12,000 IRA – 1,800 income tax = 10,200 vacation money)

Looks good, except it’s wrong.  See, if you’re on that border, then half of the $12,000 is going to go into the taxable Social Security pile.  So instead of paying 15% on $12,000 you’re paying 15% on $18,000; that’s another $900 in taxes.  ($18,000 X 15% = $2,700    and    $2,700 – $1,800 = $900) 

Now you don’t have enough money to pay for your vacation.  You’ll need to be taking more out of your IRA and then even more of your Social Security will be taxed.

Because taking that distribution makes your Social Security Taxable—your real tax rate is 22.5% instead of 15%.

$2,700 tax divided by $12,000 distribution = 22.5% tax rate

For lots of people, there really isn’t much you can do.   If your income is high enough, you’re stuck with your Social Security being taxed and there’s no way out.   But for some folks—you can plan ahead to avoid this bumped up tax—or at least try to reduce it.  You’ve got to know about the tax though if you’re going to plan ahead for it.  If you want help figuring out if your Social Security is taxable, give us a call.