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Looking back in time the taxation of Social Security benefits began in 1984 prior to that benefit payments were exempt from federal income tax.
The taxable amount of income was set at 50 percent and later in 1993 increased to 85 percent depending on total income received during the year.
Today the taxable amount is divided into three categories:
No portion of a tax payer benefit is taxed.
50 % of ones benefits are taxed.
85 % is subject to federal income tax.
What determines the amount taxable is broken down into two areas:
Your tax filing status
Your modified adjusted gross income (MAGI)
The formula for MAGI is 50 % of Social Security plus all other income.
So far we have discussed the federal taxation, don’t forget that depending on the state where you live there might be additional taxes due based on your specific state where you live.
Of course those few states that have no state income tax wouldn’t be of any concern, however the remaining states could possibly tax some of the benefits, you should check with your local state for their guidelines.
Earned Income
If you start your benefits prior to full retirement age your benefits may be reduced depending on how much earned income you received during any given year. If you are under full retirement age, your benefit will be reduced $1 for every $2 you earn above $15,120; once you reach full retirement age there is no reduction of benefits.
Daniel Iuculano, AAMS CMFC
Accredit Asset Management Specialist
Chartered Mutual Fund Counselor
