Magic: Social Security Benefits

How do you know if your Social Security benefits are taxable?

The answer requires MAGIC —
(the Modified Adjusted Gross Income Calculation).

The “magic” number, generally, is your adjusted gross income (excluding your social security benefits) plus 50% of those benefits plus any tax-exempt interest income.  So much for tax-exempt interest being tax exempt!

If the “magic” number exceeds the first of two base amounts ($32,000 if married filing jointly, $0 if married filing separately and the spouses lived together at any time during the year and $25,000 for all other taxpayers), the fun begins.  You then have to determine if the “magic” number exceeds the second of two base amounts ($44,000, $0 and $34,000, respectively).  To determine how much of your benefits are taxable, you replace the batteries in your calculator and continue as follows:

• If the “magic” number exceeds the first base amount but not the second, the taxable portion of your benefits equals the lesser of 50% of the excess or 50% of your benefits

• If the “magic” number exceeds the second base amount, the taxable portion of your benefits equals the lesser of 85% of your benefits or the sum of a) 85% of the “magic” number minus the second base amount and b) the lesser of the amount calculated under 1) above or $4,500 ($6,000 if married filing jointly)

If you have to use formula 2), you may want to check your batteries again.

If your social security benefits are currently not taxable or minimally taxable because your “magic” number is relatively low, it is important to realize that an increase in income may cause more of your benefits to be taxable.  Do not attempt to generate income you feel may not be includable in the “magic” number.  For example, embezzled funds are taxable.  In addition, funds obtained from robbing a bank are not only taxable, but the practice is generally considered inappropriate.  A call to one of our professionals would be more appropriate in planning to minimize your tax liability.