#5 – Screwy Tax Provision – Social Security Taxation at 85%

Most people do not argue that some portion of social security should be taxed.  After all employers got a tax deduction for the FICA tax they paid in on behalf of the employer.  That is the usual logic in any event.  It is only used as a method to hurt the taxpayer.  It rarely is used when the shoe is on the other foot.

The level of taxation of Social Security Benefits is dependent on your filing status and your level of adjusted gross income.

The base income  amounts that must be exceeded for Social Security to be taxable is $25,000 for Single or Married Filing Separately.  For married couples the base amount is $32,000.  Once you exceed these amounts with wages, dividends, even if exempt, and other income, you may be subject to tax on 85% of your social security income.  Follow the worksheet in Internal Revenue Publication 915 to come up with the amount that is taxable.

Unfortunately in some cases an additional $10,000 in income in a particular year can become the equivalent of an 80% tax rate for your social security.  That is just one scenario.  If you have the ability to move income into the next year, for example a decision to sell securities or property, this fact must be part of the decision.