Retirement: 1-7 Tax Treatment of Social Security Benefits Flashcards Preview

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1

Retirement: 1-7 Tax Treatment of Social Security Benefits

Frank is a widower, and has AGI of $15,000. In addition he receives an annual Social Security benefit of $18,000. What possible income tax ramifications may he have regarding his Social Security payments?

1-7

Frank’s MAGI (modified adjusted gross income) is

$15,000
+ $9,000 (one half of Social Security)
= $24,000.

This is below $25,000, which is the start of the 50% threshold for single filers, so none of his Social Security benefit is taxable.

2

Retirement: 1-7 Tax Treatment of Social Security Benefits

Anna and her husband have invested in municipal bonds for years, and currently have $12,000 a year in tax-free interest. They just started collecting Social Security retirement this year, and their AGI is only $20,000, so they were surprised when you told them that a portion of their $17,000 Social Security retirement benefit was taxable. What was your calculation for Anna and her husband?

1-7

First calculate the MAGI;

$20,000
+ $8,500 (one-half of Social Security)
+ $12,000 (tax-free interest is included in this calculation)
= $40,500.

Between $32,000 and $44,000, 50% of Social Security benefits are taxable.

$40,500
- $32,000
= $8,500 into the threshold.

$8,500
× .50
= $4,250 taxable portion of Social Security.

3

Retirement: 1-7 Tax Treatment of Social Security Benefits

Frank and Cynthia have an adjusted gross income of $33,000, an annual Social Security benefit of $24,000, and interest of $7,000 from tax-free bonds. How much of their Social Security benefit, if any, is taxable?

1-7

MAGI is

$33,000
+ $12,000 (one-half of Social Security)
+ $7,000
= $52,000.

Between $32,000 and $44,000, 50% of Social Security benefits are taxable, so $12,000 threshold range × .50 = $6,000 taxable portion of Social Security

$52,000 MAGI
- $44,000
= $8,000 into 85% threshold, so

$8,000
× .85
= $6,800

$6,800
+ $6,000
= $12,800.

So $12,800 of the $24,000 in Social Security benefits is taxable. Remember that the maximum amount that can be taxed is 85%, so in the case of Frank and Cynthia the maximum amount that could potentially be taxed is $24,000 × .85 = $20,400.

4

Retirement: 1-7 Tax Treatment of Social Security Benefits

Module Check

24. Bertha is single and her only source of income is her $1,297 monthly Social Security check. How much of her Social Security benefit will be taxable?

0%

50%

85%

(LO 1-7)

0%

For a single person with “provisional income” less than $25,000, Social Security benefits are not taxed.

5

Retirement: 1-7 Tax Treatment of Social Security Benefits

Module Check

25. Beulah is single and her monthly Social Security check is $950. She also has municipal bonds that pay $2,400 per month. How much of her Social Security benefit will be taxable?

0%

50%

85%

(LO 1-7)

85%

We count 50% of Beulah’s Social Security benefit ($5,700) plus the tax-free income ($28,800) to calculate her “provisional income,” which totals $34,500. Since her provisional income exceeds $34,000, 85% of her Social Security benefit is taxable income.

6

Retirement: 1-7 Tax Treatment of Social Security Benefits

Example 1. Fred and Wilma are receiving $28,000 in Social Security retirement benefits. Their AGI is $32,000, and they earned $3,000 in tax-free interest. What amount, if any, of their Social Security is taxable?

1-7

Step 1:
$32,000 AGI
+ $14,000 1/2 SS Benefit
+ $3,000 tax free interest
= $49,000 MAGI

Step 2:
$44,000
- $32,000
= $12,000
* 50%
= $6,000

Step 3:
$49,000
- $44,000
= $5,000
* 85%
= $4,250

Step 4:
$6,000
+ $4,250
= $10,250

Step 5:
$28,000
× .85
= $23,800

$23,800 > $10,250, so we are fine



7

Retirement: 1-7 Tax Treatment of Social Security Benefits

Example 2. Barney and Betty are receiving $32,000 in Social Security retirement benefits. Their AGI is $20,000, and they have $1,000 in tax-free interest. What amount, if any, of their Social Security is taxable?

1-7

Step 1:
$16,000 (½ of SS)
+ $20,000
+ $1,000
= $37,000 MAGI

Step 2:
They are in the 50% threshold (between $32,000 and $44,000), so $37,000 – $32,000 = $5,000 into the threshold, so $5,000 × .50 = $2,500

Steps 3, 4, and 5:
They are not in the 85% threshold, so no further calculations are necessary, so the $2,500 is the amount that must be included in taxable income of the $32,000 they are receiving in Social Security benefits.

8

Retirement: 1-7 Tax Treatment of Social Security Benefits

Example 3. Dino and Juliet are receiving $44,000 in Social Security retirement benefits. Their AGI is $50,000, and they have $12,000 in tax-free interest. What amount of their Social Security is taxable?

1-7

Step 1:
$22,000 (½ of SS)
+ $50,000
+ $12,000
= $84,000

Step 2:
50% of $12,000 (the $32,000 to $44,000 threshold)
= $6,000

Step 3:
$84,000
– $44,000
= $40,000
× .85
= $34,000

Step 4:
$6,000
+ $34,000
= $40,000

Step 5:
$44,000
× .85
= $37,400 is the maximum amount of the benefit that can be taxed, so that is the amount that will be subject to taxation, not the $40,000.

9

Retirement: 1-7 Tax Treatment of Social Security Benefits

What is the 1st step of the SS taxation process?

a. Calculate the SS subject to the 50% threshold

b. Add the 50% and the 85% amounts together

c. Make sure not more than 85%

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

e. Calculate the SS subject to taxation at the 85% threshold

1-7

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

10

Retirement: 1-7 Tax Treatment of Social Security Benefits

What is the 2nd step of the SS taxation process?

a. Calculate the SS subject to the 50% threshold

b. Add the 50% and the 85% amounts together

c. Make sure not more than 85%

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

e. Calculate the SS subject to taxation at the 85% threshold

1-7

a. Calculate the SS subject to the 50% threshold

11

Retirement: 1-7 Tax Treatment of Social Security Benefits

What is the 3rd step of the SS taxation process?

a. Calculate the SS subject to the 50% threshold

b. Add the 50% and the 85% amounts together

c. Make sure not more than 85%

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

e. Calculate the SS subject to taxation at the 85% threshold

1-7

e. Calculate the SS subject to taxation at the 85% threshold

12

Retirement: 1-7 Tax Treatment of Social Security Benefits

What is the 4th step of the SS taxation process?

a. Calculate the SS subject to the 50% threshold

b. Add the 50% and the 85% amounts together

c. Make sure not more than 85%

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

e. Calculate the SS subject to taxation at the 85% threshold

1-7

b. Add the 50% and the 85% amounts together

13

Retirement: 1-7 Tax Treatment of Social Security Benefits

What is the 5th step of the SS taxation process?

a. Calculate the SS subject to the 50% threshold

b. Add the 50% and the 85% amounts together

c. Make sure not more than 85%

d. Add AGI, 1/2 of SS benefits, and any tax free interest to arrive at MAGI

e. Calculate the SS subject to taxation at the 85% threshold

1-7

c. Make sure not more than 85%

14

Retirement: 1-7 Tax Treatment of Social Security Benefits

Social Security benefits are not taxable as income by the federal government if the taxpayer is a single individual whose provisional income is $_____ or less

a. $25,000

b. $35,000

c. $45,000

a. $25,000

15

Retirement: 1-7 Tax Treatment of Social Security Benefits

Social Security benefits are not taxable as income by the federal government if the taxpayers are a married couple (filing jointly) whose provisional income is $_____ or less

a. $22,000

b. $32,000

c. $42,000

b. $32,000

16

Retirement: 1-7 Tax Treatment of Social Security Benefits

Single taxpayers and those taxpayers who are married, filing and living separately, and whose provisional income ranges from _____ are subject to taxation on 50% of their benefits.

a. $12,000 to $24,000

b. $15,000 to $30,000

c. $25,000 to $34,000

c. $25,000 to $34,000

17

Retirement: 1-7 Tax Treatment of Social Security Benefits

Married taxpayers whose provisional income ranges from _____ are subject to taxation on 50% of their benefits.

a. $22,000 to $34,000

b. $32,000 to $44,000

c. $42,000 to $54,000

b. $32,000 to $44,000

18

Retirement: 1-7 Tax Treatment of Social Security Benefits

Up to 85% of Social Security benefits are subject to federal income taxation if the beneficiary’s provisional income exceeds _____ single or married, filing and living separately

a. $24,000

b. $34,000

c. $44,000

b. $34,000

19

Retirement: 1-7 Tax Treatment of Social Security Benefits

Up to 85% of Social Security benefits are subject to federal income taxation if the beneficiary’s provisional income exceeds _____ married filing jointly

a. $24,000

b. $34,000

c. $44,000

c. $44,000