Figuring Taxes on Social Security Benefits
by Julian Block
Americans often dream about a simplification of the Byzantine Internal Revenue Code, only to awaken and find the tax laws becoming more complicated.
The rules for Social Security benefits are especially convoluted and confusing. Although most Social Security recipients escape income taxes completely on all of their benefits, middle- and upper-income level retirees have to count up to 85% of their benefits as reportable income.
In this article
- Gift of the MAGI
- Considerations for Couples Who File Separately
- Further Rules
- The Effect of Ignoring Inflation
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Gift of the MAGI
Taxes are triggered for Social Security recipients when their MAGI exceeds specified amounts. MAGI is an acronym for modified adjusted gross income, which in most instances is essentially the same amount as adjusted gross income.
To calculate whether MAGI surpasses the tax-triggering thresholds, retirees must consider income from various sources such as: salaries, pensions, dividends, capital gains, rents, Roth conversions (money moved out of traditional IRAs and into Roth accounts), and required minimum distributionsstarting at age 70½ from traditional IRAs, 401(k)s, and other retirement plans.
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