Section 86: How Social Security Benefits Are Taxed

A portion of your Social Security benefits may be subject to federal income tax, depending on your income level. The rules for this taxability are outlined in Section 86 of the Internal Revenue Code. Since 1984, individuals with income over certain amounts have paid taxes on their benefits, and this system was expanded in 1993. This created a two-tiered structure that can tax up to 85% of benefits for those with higher incomes from sources like employment, pensions, or retirement account distributions.

Determining if Your Benefits are Taxable

To determine if your Social Security benefits are taxable, you must first calculate your “provisional income,” also called combined income. This figure is the sum of your Adjusted Gross Income (AGI), any nontaxable interest you received, and one-half of your total Social Security benefits for the year. Your AGI is your gross income minus certain deductions, and nontaxable interest can come from sources like municipal bonds.

Once calculated, compare your provisional income to the base amounts set by the Internal Revenue Service (IRS), which vary by filing status. For individuals filing as single, head of household, or qualifying widow(er), the base amount is $25,000. If your provisional income is below this amount, your benefits are not subject to federal income tax.

For those married filing a joint tax return, the base amount is $32,000. If the combined provisional income for you and your spouse is under this threshold, your benefits are not taxed. For those who are married and file separate returns, you will likely have to pay taxes on your benefits if you lived with your spouse at any point during the year.

Calculating the Taxable Portion

If your provisional income exceeds the initial base amounts, a portion of your Social Security benefits will be taxable under a two-tiered system. The first tier applies to provisional income between $25,000 and $34,000 for single filers, or between $32,000 and $44,000 for those married filing jointly. The taxable portion is the lesser of 50% of your benefits or 50% of the amount your provisional income exceeds the first base amount.

For example, a single filer with $20,000 in Social Security benefits and $20,000 in other income has a provisional income of $30,000. This exceeds the $25,000 base amount by $5,000. The taxable amount is the lesser of $10,000 (50% of benefits) or $2,500 (50% of the $5,000 excess), meaning $2,500 of their benefits are taxable.

The second tier applies to individuals with provisional income exceeding $34,000 (for single filers) or $44,000 (for married couples filing jointly). For these taxpayers, up to 85% of their benefits can be taxed, based on the lesser of 85% of your benefits or a more involved formula.

This second-tier formula is 85% of the amount your provisional income exceeds the second threshold, plus the smaller of either the amount calculated under the 50% rule or a fixed dollar amount. The fixed amount is $4,500 for single filers and $6,000 for those married filing jointly.

Reporting Taxable Social Security Benefits

You must report the taxable portion of your Social Security benefits on your federal income tax return. The Social Security Administration provides Form SSA-1099, the Social Security Benefit Statement, which details the total benefits you received. Box 5 of this form shows the net benefits paid to you, which is the starting point for your calculations.

You will use the information from Form SSA-1099 to complete your Form 1040 or Form 1040-SR. You will report the total benefits from Box 5 and the taxable portion you calculated on the designated lines.

If you anticipate that your benefits will be taxable, you can have federal income tax withheld from your monthly payments. To do this, submit Form W-4V to the Social Security Administration and choose one of the following withholding rates:

• 7%
• 10%
• 12%
• 22%