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The Sneaky Stealth Tax on Social Security Benefits

My social security benefits should be free from federal income taxes, right? Most people would believe so, and for most people, that is true. However, your overall income level could put you at risk of being hit with a stealth tax against your Social Security benefits.


Stealth tax is a form of taxation that is implemented in a way that is not immediately obvious or noticeable to taxpayers. It often increases the tax burden without an explicit announcement or a clear, direct increase in tax rates. To understand if you fall prey to a stealth tax on your social security benefits, you must first know your provisional income.


Reporting your Provisional Income

Begin 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. Next, add the following (only those applicable) to that number:

  1. 50% of Social Security benefits,

  2. Any tax-free municipal bond interest income,

  3. Any tax-free interest on U.S. Savings Bonds used to pay college expenses,

  4. Any tax-free adoption assistance payments from your employer,

  5. Any deduction for student loan interest, and

  6. Any tax-free foreign earned income and housing allowances, and certain tax-free income from Puerto Rico or U.S. possessions.


The total reflected after these additions is your provisional income.


Now, let’s look at 3 scenarios in which a stealth tax on one’s social security taxes could occur.


Scenario 1: Tax Free Benefits

If your provisional income is $32,000 or less, and you file a joint return with your spouse, your Social Security benefits will be federal-income-tax-free. If your provisional income is $25,000 or less, and you don’t file jointly, the general rule is that Social Security benefits are federal-income-tax-free.


However, if you’re married and file separately from your spouse who lived with you at any time during the year, you must report up to 85% of your Social Security benefits as income unless your provisional income is zero or a negative number, which is unlikely.


Scenario 2: 50% of your Benefits are Taxed

If your provisional income is between $32,001 and $44,000, and you file jointly with your spouse, up to 50% of your Social Security benefits must be reported as income on Form 1040.


If your provisional income is between $25,001 and $34,000, and you don’t file a joint return, up to 50% of your benefits must be reported as income.


Scenario 3: 85% of your Benefits are Taxed

If your provisional income is above $44,000, and you file jointly with your spouse, you must report up to 85% of your Social Security benefits as income on Form 1040.


If your provisional income is above $34,000, and you don’t file a joint return, the general rule is that you must report up to 85% of your Social Security benefits as income.


 

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We have simplified how stealth taxes may affect your Social Security benefits. And with your unique information, we can accurately determine your stealth tax, if any, on your Social Security benefits. Contact our team to begin.

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