1. How Social Security Benefits Can Be Taxed
(pgs. 5-17 and 5-18 in text)
Historical
1983 and Before – Not taxed regardless of income
1984 – 1993 – A maximum of 50% could be taxed if modified AGI + ½ of the
Social Security Benefits Exceeded a base amount:
MFJ = $32,000
Unmarried = $25,000
1994 – Today – Same as 1993, but now have a second threshold and a new term,
called “provisional income”
Provisional income = AGI + tax exempt muni bond interest + ½ Benefits
Second Threshold
MFJ = $44,000
Unmarried = $34,000
Currently, if provisional income exceeds the second threshold, then up to but
never more than 85% of Soc. Security Benefits will be taxed.
Note : Married taxpayers filing separately have no base amount and must include in gross
income the lesser of (a) 85% of their SS benefits or (b) 85% of their provisional income
(This will not be covered in great detail, as there are some exceptions beyond the scope
of this class.)
Terms: The terms used for these calculations, like Base Amount, Threshold Amount,
Modified AGI, and Provisional Income are tricky to keep straight. Let’s discuss them in
more detail:
Modified AGI = AGI (excluding Soc. Sec.) + tax- exempt income
Provisional Income = Modified AGI + ½ Social Security benefits.
Married Unmarried
Joint Separate Single HOH
50% Base Amount $32,000 $0 $25,000 $25,000
85 % Threshold Amount $44,000 $0 $34,000 $34,000
Note that to calculate taxability of benefits under current law, item B-2 on pg. 5-5, it says
the lesser of
2. 1. Amount of SS benefits taxable under prior law or
2. $6,000 for Joint and $4,500 for unmarried (notice that those amounts are exactly
½ the difference between 50% base and 85% threshold.)
Situations to Remember
1. If “provisional income” is less than 50% base amount, then NONE of the
benefits are taxable
2. If “modified AGI” equals or exceeds the 85% threshold, then 85% of the benefits
are taxable.
3. If “provisional income” is more than the 50% base, but less than the 85%
threshold, then the portion taxed can never exceed 50% of the benefits received.
4. If “modified AGI” is less than the 50% base but “provisional income” is between
the 50% and 85%, then less than 50% of the benefits will be taxed.
5. When “modified AGI” is close to or above the 50% threshold and provisional
income is more than the 85% threshold, apply the formula on pg 5-5 very
carefully.
THE FORMULA
(For those exceeding 85% threshold)
The Lesser of:
1. 85% of SS benefits
2. (85% of the amount that provisional income exceeds the 85% threshold) PLUS
(the smaller of the amount of SS benefits taxable under prior law OR $6,000 for
Joint and $4,500 for unmarried)
AND FINALLY
Benefits are taxable to the individual that receives the benefits. Therefore benefits that a
child receives are not considered income to the parent, and the child must calculate their
inclusion amount the same as any other taxpayer.
