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Taxes and Social Security

Social Security Income and Taxes

Social Security income may be taxable, depending on the amount and type of other income a taxpayer receives.

If a taxpayer only receives Social Security income, this income is generally not taxable. If a taxpayer receives other income in addition to Social Security income, then up to 85% of the Social Security income could be taxable. There is a “floor” ($32,000 married filing jointly; $0 married filing separately; $25,000 all other taxpayers) whereby a portion of Social Security benefits become taxable and that the 85% inclusion kicks in once provisional income goes above a “ceiling” ($44,000 married filing jointly; $0 married filing separately; $34,000 all other taxpayers). For married taxpayers filing a joint return and for married persons filing separately who do not live apart from their spouses for the whole year, the “provisional income” threshold is $0. A complicated formula is necessary to determine the amount of Social Security income that is subject to income tax. (We suggest working with a qualified tax preparer and/or using the worksheet in IRS Publication 915 to make this determination.)

Finally, it is important to note that Social Security income is included in the calculation of Modified Adjusted Gross Income (MAGI) for purposes of calculating the 3.8% Medicare surtax on “net investment income” (as discussed below). Therefore, taxpayers having significant net investment income might have more reason to defer Social Security benefits.

Social Security Changes

As a result of the Bipartisan Budget Act of 2015, “Restricted Application” and “File and Suspend” strategies are being and have been phased out.

Restricted Application – Available to individu­als born on or before January 1, 1954. This strategy can be elected when the individual reaches their full retirement age or later. Restricted application creates an opportunity for one member of a couple to claim a spousal benefit if their spouse has filed, while allowing their own benefit to grow until age 70. At age 70 they normally transition from a spou­sal benefit to their own benefit, if higher.

File and Suspend – Before its expiration on April 30, 2016, this strategy allowed one spouse to file for their Social Security benefit at their full retire­ment age and immediately suspend receiving their benefit. The act of filing and immediately suspend­ing their benefit allowed the other spouse to begin drawing a spousal benefit. This process also allowed both of their worker benefits to defer cred­its up until age 70. At age 70 they would then switch to their own worker benefit, if higher.

This content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.