Beware of a Stealth Tax on Social Security Benefits
Some people mistakenly believe that Social Security benefits are always free from federal income tax. Unfortunately, that’s often not the case. In fact, depending on how much overall income you have, up to 85% of your benefits could be hit with federal income tax.
While the truth about the federal income tax bite on Social Security benefits may be painful, it’s better to understand it. Here are the rules.
Calculate provisional income
The amount of Social Security benefits that must be reported as taxable income on your tax return depends on your “provisional income.” To arrive at provisional income, start with your adjusted gross income (AGI), which is the number that appears on Page 1, Line 11 of Form 1040. Then, subtract your Social Security benefits to arrive at your adjusted AGI for this purpose.
Next, take that adjusted AGI number and add the following:
- 50% of Social Security benefits,
- Any tax-free municipal bond interest income,
- Any tax-free interest on U.S. Savings Bonds used to pay college expenses,
- Any tax-free adoption assistance payments from your employer,
- Any deduction for student loan interest, and
- Any tax-free foreign earned income and housing allowances, and certain tax-free income from Puerto Rico or […]