8568 / Are Social Security and railroad retirement benefits taxable?

A taxpayer must include a portion of benefits in gross income if the taxpayer’s modified adjusted gross income (in most cases the taxpayer’s adjusted gross income) plus one-half of the Social Security benefits (including tier I railroad retirement benefits) received during the taxable year exceeds certain base amounts. The amounts that are required to be included in gross income are taxed as ordinary income. As the taxpayer’s income in addition to Social Security benefits increases, so does the amount of those benefits that are taxable. However, the amount of benefits that are taxable can never exceed 85 percent of the total benefits received by the taxpayer.

$25,000 for taxpayers filing as single, head of household or qualifying widow(er)s;

$25,000 for married taxpayers who file separately and live apart from the other spouse for the entire tax year;

$32,000 for married taxpayers filing jointly; or

$0 for married taxpayers who file separately, but live with a spouse at any time during the tax year.²

If the modified adjusted gross income plus one-half of Social Security benefits is equal to or less than the base amount, no portion of the Social Security benefits are taxable.

On the other hand, if the sum of modified adjusted gross income plus one-half of Social Security benefits exceeds the base amount, then a portion of those benefits are potentially taxable. The computation, however, involves the “adjusted base amount” which is the following:

$34,000 for all filers with the exception of joint filers and a married taxpayer that both files separately and lives with his or her spouse at any time during the tax year.

$44,000 for joint filers.

$0 for a married taxpayer who files separately and lives with his or her spouse at any time during the taxable year.³

If the sum of modified adjusted gross income plus one-half of Social Security benefits is greater than the base amount but less than the adjusted base amount, the amount included in gross income is the lesser of 1) one-half of the Social Security benefits received during the tax year; or 2) one-half of the excess of the sum of modified adjusted gross income plus one-half of the amount of Social Security benefits that exceeds the base amount (referred to as the “Section 86(a)(1) Amount”).⁴

 

Example: A married couple files a joint return. During the taxable year, they received $12,000 in Social Security benefits and have a modified adjusted gross income of $35,000. Their modified adjusted gross income plus one-half of their Social Security benefits [$35,000 + (½ of $12,000) = $41,000] is greater than the base amount of $32,000 but less than the adjusted base amount of $44,000.

So in computing the taxable amount of Social Security benefits, consider the following: the taxpayers’ Social Security benefits are $12,000 and the excess of (1) modified adjusted gross income plus one-half of their Social Security benefits over (2) the base amount is equal to $9,000 ($41,000 minus $32,000). However, referring back to the formula, the amount includible is one-half of the lesser amount. Therefore, the amount of Social Security benefits included in gross income is $4,500 (one-half of $9,000) because it is less than $6,000 (one-half of the $12,000 total Social Security benefits).

If the sum of modified adjusted gross income plus one-half of Social Security benefits is greater than the adjusted base amount, the amount included in gross income is the lesser of the sum of 1) 85 percent of the amount of modified adjusted gross income over the adjusted base amount plus the lesser of (a) the Section 86(a)(1) Amount or (b) one-half of the difference between the adjusted base amount and the base amount or 2) 85 percent of the Social Security benefits received during the tax year.

 

Example: During the taxable year, a single individual had a modified adjusted gross income of $33,000 and received $8,000 in Social Security benefits. His modified adjusted gross income plus one-half of his Social Security benefits [$33,000 + (½ of $8,000) = $37,000] is greater than the applicable adjusted base amount of $34,000.

So tracking the formula above: the lesser of

1) 85 percent of the amount of modified adjusted gross income over the adjusted base amount of $3,000 ( $37,000 (modified adjusted gross income) minus the $34,000 adjusted base amount), or $2,550, plus the lesser of a) the Section 86(a)(1) amount of $6,500 (which is one-half of $13,000, i.e., the excess of $37,000 (modified adjusted gross income) over the base amount of $24,000) or b) $4,500 (which is one-half of $9,000, the difference between the $34,000 adjusted base amount and the $25,000 base amount); or

2) 85 percent of total Social Security benefits of $8,000, or $6,800.

So consolidating the above formula, 85 percent of $3,000, or $2,550 plus $4,500, equals $6,550 which is less than 85 percent of $8,000, or $6,800. Therefore, the amount included in gross income is $6,550.