The Taxation of Social Security Benefits Explained

The key to understanding your Social Security tax is a concept called “provisional income,” sometimes referred to as combined income. This is not a number you will find on your tax forms; it is a specific calculation the IRS uses only to determine if your Social Security benefits are taxable. The formula may seem intimidating at first, but it is quite simple when broken down.

Your provisional income is calculated with three components:

1. Your Modified Adjusted Gross Income (MAGI). For this calculation, this generally includes all of your taxable income, such as wages, pension payments, and withdrawals from traditional IRAs or 401(k)s.

2. Any tax-exempt interest you earned. This could be interest from municipal bonds, for example.

3. Fifty percent (50%) of your total Social Security benefits for the year.

You add these three amounts together to find your provisional income. Once you have that number, you compare it to the federal income thresholds to see how much, if any, of your benefits are subject to tax. These thresholds depend on your tax filing status.

For individuals filing as Single, Head of Household, or Qualifying Widow(er):

If your provisional income is $25,000 or less, your Social Security benefits are not taxable.

If your provisional income is between $25,001 and $34,000, up to 50% of your benefits may be taxable.

If your provisional income is more than $34,000, up to 85% of your benefits may be taxable.

For those filing as Married Filing Jointly:

If your provisional income is $32,000 or less, your Social Security benefits are not taxable.

If your provisional income is between $32,001 and $44,000, up to 50% of your benefits may be taxable.

If your provisional income is more than $44,000, up to 85% of your benefits may be taxable.

Let’s walk through an example. Meet John and Mary, a retired couple who file their taxes jointly. In one year, their income consists of the following:

$30,000 from John’s traditional IRA withdrawals.

$15,000 from Mary’s pension.

$2,000 in tax-exempt interest from municipal bonds.

$32,000 in total Social Security benefits for the year.

First, we calculate their provisional income. We start with their adjusted gross income, which is the IRA withdrawal plus the pension: $30,000 + $15,000 = $45,000. Next, we add their tax-exempt interest: $45,000 + $2,000 = $47,000. Finally, we add half of their Social Security benefits: $47,000 + (50% of $32,000) = $47,000 + $16,000. Their provisional income is $63,000.

Since John and Mary are married filing jointly, we compare their $63,000 provisional income to the federal thresholds. Their income is well above the $44,000 limit. Therefore, up to 85% of their Social Security benefits will be included in their taxable income for the year. In their case, that means up to $27,200 (85% of $32,000) could be taxed. The exact amount is determined by a complex worksheet, but this calculation tells them they fall into the highest tier for Social Security taxation.

This formula shows that managing withdrawals from other retirement accounts is a key part of how to reduce taxes on your Social Security. If John and Mary had withdrawn less from the IRA, their provisional income would have been lower, potentially reducing their tax burden.