How to Calculate Taxable Social Security (2021 Line 6b)

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The Social Security program was intended to help support those who are not working or cannot work. It is paid for by a 12.4% payroll tax on your earnings with half paid by the employer and half paid by the employee.

Most people think about this tax as paying for their own future benefits, but that is not the case. Current payments into the Social Security system are used to pay current beneficiaries. In other words, your Social Security payments paid for your parents’ and grandparents’ Social Security benefits. Your children and grandchildren will pay for yours.

This is one reason why the government justifies having Social Security benefits be potentially taxable in the year you receive them. It is a small way of means testing Social Security. Having other taxable income on your return reduces your nontaxable Social Security, effectively resulting in you paying back some of your benefits.

If you receive Social Security benefits, the portion of those benefits which will be taxable depends on your income. The taxable portion can be anywhere from 0% to a maximum of 85% of your benefits. To determine this amount, the IRS provides tax filers with the 18-step “Social Security Benefits Worksheet” found in the 1040 instructions. Currently for the 2021 tax forms, it is in the instructions for lines 6a and 6b.

While this worksheet is helpful for calculating the taxable and nontaxable amounts, it is difficult to grasp what is actually happening.

Essentially, Social Security benefits have their own tax brackets that are filled out by a unique methodology of calculating income known as “Provisional Income.”

How Provisional Income Is Calculated

According to the IRS, provisional income is half of your Social Security Benefits, plus Form 1040 lines 1, 2a, 2b, 3b, 4b, 5b, 7, and 8. That is all of the boxes below that are outlined in red on your 1040:

When adding up your income, provisional income differs from Adjusted Gross Income (AGI) because 1) tax-exempt interest (line 2a) is included and 2) only half of your gross Social Security is included.

Next, you subtract Schedule 1, lines 11 through 20 as well as lines 23 and 25. That is all of the following boxes that are outlined in red from Schedule 1:

When calculating your adjustments to income, provisional income differs from AGI because it does not adjust by line 21, the student loan interest deduction.

To summarize, the resulting number from all of those boxes is your AGI with a couple of slight changes.

Those changes can be summarized with the following formula:

 

Social Security Brackets

Unlike the income tax brackets or the qualified rate brackets, the Social Security brackets do not determine the amount of tax owed. Instead, they determine the amount of your Social Security benefits which will be subject to income tax.

What is more, rather than using taxable income or AGI, you compare your provisional income (formula above) to these thresholds.

For tax year 2021, the Social Security Brackets are:

Single Married Filing Jointly Taxable Rate
First Threshold $25,000 $32,000 50%
Second Threshold $34,000 $44,000 85%

 

For every dollar over the first threshold and below the second threshold, 50% or $0.50 of your Social Security is included in taxable income.

For every dollar over the second threshold, 85% or $0.85 of your Social Security is included in taxable income.

Because any dollar above the second threshold is also above the first threshold, another way of thinking about this is that each dollar of provisional income you have over the first threshold has 50% included in taxable income and then each dollar which is also over the second threshold has an additional 35% (85%-50%) included in taxable income.

However, there is one last important rule: your Social Security benefit can be a maximum of 85% taxable.

If the percent taxable from your provisional income moving through the Social Security brackets results in a number higher than 85% of your benefits, then your taxable social security is just 85% of your benefits.

This makes the simplified Social Security calculation:

 

Examples

To make this more clear, let’s take a look at some examples.

Example 1

Imagine a single filer with $20,000 in Social Security benefits. Excluding Social Security, their AGI is $30,000. They have $500 in tax-exempt interest and $0 in student loan deductions.

Their calculation would be:

  • Provisional Income = ½ * $20,000 + $30,000 + $500 + $0 = $40,500
  • Taxable Social Security = ($40,500 – $25,000)*0.50 + ($40,500 – $34,000)*0.35 = $10,025
  • 85% of Social Security Benefit = $20,000 * 0.85 = $17,000
  • Taxable Social Security = Lesser of $10,025 or $17,000 = $10,025

While total Social Security (line 6a) is $20,000 for this single filer, their taxable Social Security (line 6b) is only $10,025.

Example 2 ($100,000 higher AGI):

Imagine the same single filer as example 1 with $20,000 in Social Security benefits. However, excluding Social Security, their AGI is $100,000 higher at $130,000. They have $500 in tax-exempt interest and $0 in student loan deductions.

Their calculation would be:

  • Provisional Income = ½ * $20,000 + $130,000 + $500 + $0 = $140,500
  • Taxable Social Security = ($140,500 – $25,000)*0.50 + ($140,500 – $34,000)*0.35 = $41,921
  • 85% of Social Security Benefit = $20,000 * 0.85 = $17,000
  • Taxable Social Security = Lesser of $41,921 or $17,000 = $17,000

While total Social Security (line 6a) is $20,000 for this single filer, their taxable Social Security (line 6b) is $17,000.

These examples show how the taxable Social Security calculation makes taxpayers with more income from other sources have more of their Social Security benefits taxed. This is also true for investment-related income sources like your intentionally realized capital gains, required minimum distributions, and Roth conversions.

While Roth conversions can push more of your Social Security benefits into higher taxable brackets, they also reduce your future Required Minimum Distributions, which can reduce the taxable portion of your Social Security benefits for many years in result.

When developing a financial plan for your traditional IRA assets or your unrealized capital gains, it can help to keep in mind how their eventual taxation can impact the taxable portion of your Social Security benefits.

Photo by bruce mars on Unsplash

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Financial Analyst

Jacob Massanopoli is a financial analyst for Marotta Wealth Management. He graduated from Virginia Tech and specializes in our tax planning services.