November 16, 2015
The answer depends on how much income you report to the IRS.
Only about 1/3 of all taxpayers receiving social security benefits will be taxed on a portion of their benefits. The first step is to calculate your eligibility income. The eligibility income is adjusted gross income (not including Social Security) plus 50% of your social security benefits plus any tax-free interest from municipal bonds or other sources. If that eligibility income is between $25,000 and $34,000 on a single return or between $32,000 and $44,000 on a joint return, then up to 50% of your social security benefits can be taxed. The rest of your benefits are not taxed.
If your eligibility income is more than $34,000 on a single return or $44,000 on a joint return, it’s likely that 85% of your benefits will be taxed.
Has your eligibility income typically been less than the taxable threshold of $25,000 for single taxpayers or $32,000 for married taxpayers? At those levels your social security benefits have not been subjected to tax. But, if you are close to the income thresholds AND you withdraw funds from an IRA account (more than you usually do annually) or cash in U.S. Savings Bonds (more than you do annually in the past), then you could be in for an unexpected tax bill. Not only will you be taxed on the IRA withdrawal and/or the amount of interest earned on the savings bonds, you have now made at least a portion of your Social Security benefits taxable! This situation will also affect you with any other types of income that is realized during the year that pushes you above the income thresholds. Some of these types of income you can control like the examples above…so be aware!
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