A few days ago a client came into our office to have their taxes done.  Despite being married, this person was adamant that they wanted to file under the “single” filing status.  When we got to the bottom of it, the reason was due to their perception that their spouse’s social security benefits could impact his tax situation or she could lose them.  Despite all of the information we provided this individual, we ended up not doing the return because they didn’t want to use the correct status.

Which brings us to our question; when are Social Security (regular, disability, or survivor) benefits subject to taxation?  The answer is it depends.  Particularly, it depends on the amount of your Adjusted Gross Income (AGI), the total amount of your Social Security benefits and where your income comes from.

• For someone filing using the status of Single, Head of Household, Widow or Married Filing Separately (and you lived apart), your benefits will generally not be taxable unless the total of your modified AGI, plus one-half of your Social Security benefits exceeds $25,000.
• If you are married and file a joint return, your modified AGI plus one-half of your Social Security benefits would generally need to exceed $32,000 before taxes kick in.
• If you are married filing a separate return, and you lived with your spouse, your threshold is actually zero, and your Social Security benefits generally may be taxable from dollar one.

The following examples will help illustrate some of the various scenarios that taxpayers may find themselves in.  Additionally, they will walk through the calculation to determine how much tax they may have to pay.

Example One: Eric and Kathy are filing a joint return for 2012 and both received social security benefits during the year. Eric received net benefits of $7,500 and Kathy $3,500. Eric also received a taxable pension of $22,000 and interest income of $500. Since half of Eric and Kathy’s benefits ($5,500) plus their modified AGI of $22,500 doesn’t exceed $32,000, none of their benefits are taxable.  Even though their benefits aren’t taxable, Eric and Kathy must file a return for 2012 because their taxable gross income ($22,500) exceeds the minimum filing requirement amount for their filing status.

Example Two: Jared and Aaronita are filing a joint return and have regular income of $15,000. They also have tax-exempt interest income of $12,000. Jared received Social Security benefits of $15,000 and Aaronita $5,000. Since half of their Social Security benefits ($10,000) plus their modified AGI ($27,000) exceeds the $32,000 threshold, they will have to pay taxes on their Social Security benefits.

Jared and Aaronita’s provisional income totals $37,000; their modified AGI of $27,000 plus one half of their Social Security benefits ($10,000).  From this amount, they would subtract their threshold limit of $32,000. This gives them a result of $5,000.  The law says that you must include the lesser of 50% of your benefits ($10,000) or 50% of the above result ($2,500) as additional income subject to tax.  Based on the above, Jared and Aaronita would include $2,500 of their Social Security benefits as additional income subject to tax. If they are in the 15% marginal tax bracket, they’ll pay about $375 (15% of $2,500) in taxes on their total benefits of $20,000.

Example Three: Ricky and Bobby are married and live together, but file separate returns for 2012.  Ricky earned $8,000 from his job and received $4,000 of Social Security benefits in 2012. Because Ricky is married filing separately and lived with his spouse during 2012, he must include 85% of his social security benefits in his taxable income. Thus, Ricky would enter $4,000 on his Form 1040, line 20a, and $3,400 on Form 1040, line 20b.

As you can see from the above, sometimes none of your benefits are taxable but that can increase to 50% all the way up to 85% in some circumstances.  Thus, the one thing to keep in mind is that as your income increases, so will the portion of your Social Security benefits that is subject to taxation.

It is also important to note that these rules also apply to Social Security disability and survivor benefits.  Many people assume that disability and/or survivor benefits are not subject to the rules regarding taxability of Social Security benefits. Unfortunately, this is not the case.  Thus, if you are receiving Social Security disability or survivor benefits, you’ll need to make sure whether any of your benefits will be subject to tax.

This IRS website has a pretty cool tool to help you determine if your Social Security or Railroad Retirement Tier I Benefits Taxable.  Additionally, IRS Publication 915 will give you much more detail regarding the taxation of your Social Security benefits and provides a number of worksheets you can use to do your own computations.