Taxation of Social Security benefits

Explanation

Social Security benefits are not automatically tax-free. The IRS uses provisional income (sometimes called combined income) to decide how much is taxable:

Provisional income	Single	Married filing jointly
Up to 0% taxable	below $25,000	below $32,000
Up to 50% taxable	$25,000 – $34,000	$32,000 – $44,000
Up to 85% taxable	above $34,000	above $44,000

These thresholds were set decades ago and are not adjusted for inflation. No more than 85% of benefits is ever taxable. Taxable benefits are then taxed at your ordinary rates. Some states also tax benefits, though most do not.

The phase-in creates a “tax torpedo”: in the range where benefits are becoming taxable, each extra dollar of IRA withdrawal can make 50 or 85 cents of benefits taxable too. A retiree in the 12% bracket can face an effective marginal rate of about 22% (12% × 1.85), and someone in the 22% bracket about 40.7%.

This is one reason some people do Roth conversions or larger IRA withdrawals before claiming Social Security. Roth IRA withdrawals do not count toward provisional income.

In scenarios, the app computes the taxable portion of benefits each year using these rules, which feeds into your marginal rate on withdrawals.

Example

A single retiree has $30,000 of IRA withdrawals and pension income and $24,000 of Social Security benefits.

• Provisional income: $30,000 + 50% × $24,000 = $42,000
• Amount over $25,000, capped at $9,000 (the $25,000 to $34,000 band): $9,000. Half of that is $4,500, which is less than half the benefit ($12,000), so $4,500.
• Amount over $34,000: $42,000 − $34,000 = $8,000 × 85% = $6,800
• Total: $4,500 + $6,800 = $11,300
• Cap: 85% × $24,000 = $20,400, which is higher, so $11,300 of benefits is taxable.