 Hello and welcome to the session in which we would look at the taxability of Social Security benefits. There's a lot of confusion about whether Social Security benefits is taxable or not. In this recording I will try to explain this concept in this way you'll be able to compute the amount whether an amount is taxable or not. Hello and welcome to the session in which we would look at the taxability of Social Security benefits. There's a lot of confusion whether social security benefit is taxable or not. And the answer is, it all depends. It depends on something called modified adjusted gross income or provisional adjusted gross income. So in this session, I will try to explain this concept. But if you are an accounting student or a CPA candidate, especially if you're a CPA candidate, I strongly suggest you check out my website, farhatlectures.com. I don't replace your CPA review course. You keep it. You can't replace it, but I can be a useful addition. I can explain the material a little bit differently than your CPA review course, which will help you understand it better, thus increasing your score by 10 to 15 points. Your risk is one month of subscription. Your potential gain is passing the exam itself. And if not for anything, check out my website to determine how well your university is doing on the CPA exam. I do have resources for other courses and CPA sections. Disconnect with me on LinkedIn if you haven't done so, like my recording. Follow me on Instagram and Facebook. So let's take a look at the taxability of income. Well, the taxability of social security benefit depends on something we call the modified or provisional income. And of course, it depends on your filing status. Okay. The effect of the rules is to execute social security benefit for people who are in the lower individual tax brackets. If you don't make a lot of money, okay, if you're in a low tax bracket, none of your social security benefit is taxable. If you are slightly a higher tax bracket up to 85%. So you could have zero social, none of it is taxable up to 85%. So this is, this is what it could be zero to 85%. Now, first, how do we compute this provisional modified income? That's the first thing you want to know. We're going to take your adjusted gross income before social security. So we're going to look at, take out social security, compute your adjusted gross income, then add any interest on your savings bonds that was executed for educational purposes. It means you received interest. It was not included in your income. Add most tax exempt interest. Add employer provided adoption benefit. Add for an income, executed for an income. Add deducted interest on educational loans. Add deductions, tuition and fees. And then add, remember 50% of your social security. Why are they adding all of this? Because all of these, the risk is somebody is getting social security. They will invest all their money in tax exempt interest. And by doing so, they will not, it will not be taxable. The interest on the tax exempt interest will not be taxable. And their social security is not taxable as well. So what they're saying, it's not fair. What we need to do is if you have anything that's tax exempt and usually on the CPA exam, usually they'll give you, they have tax exempt interest. And in the real world, usually it's people will have tax exempt interest that they have to add to their gross income. Okay. But that's what they have to do. They have to add certain items to arrive to something called provisional or modified income or modified adjusted gross income. That's the first thing we need to do. Then after we compute this, then we have to follow this formula that's going to show us how to determine whether the amount, whether the amount of social security is taxable or not. So here's how it works. First, I'm going to go over the formula for merit filing jointly. It works the same way for single head of a household qualifying widow or widower. First of all, if you, if your provisional income is below 32,000, so it's below this amount, you're good. You don't have to worry about anything. It means zero of your social security is taxable. Then you, your provisional could be between 32 and 44. Okay. So you're in the middle in between 32 and 44. The taxable portion of the benefit, if the income is between those two limit is the lesser of 50% of your social security benefit or 50% of the access of provisional income over 32,000. Okay. So we're going to look what's the provisional income of our 42,000. We're going to take 50% of it and compare that to 50% of your benefit. And we're going to take the lesser of those two numbers. If, if, now, if your provisional income is above 44,000 taxable income, taxable portion of benefit, if provisional income is above the limit, we're going to take the lesser of 85% of the benefit or 85% of the access of provisional income over 44,000 plus the lesser of either 6,000 may be filing jointly or 50% of your benefits. So you tag that to it. And if you are single, they have different, different figures. Remember, if you are single, they have different figures, but the concept is the same. The best way to illustrate these concepts, guess what is to actually work in example. Okay. Let's take a look at it. Robert and Cindy finally joined return. So we're looking here. So we're looking here. So we're looking here. Their AGI before social security is 15,000 and receive 8,000 of benefit, which is social security benefit. Okay. They had no items to add back. So first thing, computer provisional income. Well, we're going to take their AGI plus 50% of their social security. Therefore, their provisional income is 19,000. Guess what? 19,000 is below 32. No social security benefit is taxable. Karen files a return as a qualifying widow, which is, will bring us here to this table. She received 7,000 in social security benefit, 19,000 of interest income, and 5,000 of non-taxable municipal bond interest. First, compute the provisional income. Be careful here, what we're asking. Compute the provisional income. We're going to take half of the social security, plus 19,000 plus 5,000, which is provisional income is 27,500. This provisional income puts Karen in this right here in the middle. Now we have to look at the taxable portion will be 50%, the lesser of 50% of the benefit, which is 3,500, or 50% of the access amount, 25% of or 25,000. So we have to find out what's the access amount over 25,000, which is 2,500. Okay, let's do that. So the taxable income will be the less equal to the lesser of 50% of social security, which is 3,500, or the access at 50% of the access of the income over 25,000. Remember, we only have 2,500 times 50% is 1,250. Therefore, the accessible benefit is 1,250. That's the taxable benefit. So of the 7,000 that she received, 1,250 is taxable, the remaining is tax-free. The remaining is tax-free. Let's take a look at this third example. CNM filed a joint return showing interest and dividend of 46,000, self-employment income for Carlson, 31,000, and non-taxable muniband of 10,000. They executed 1,000 of interest on education alone and they received social security of 9,000. The first thing we do is we compute their provisional income, okay, which is for their self-employment plus their dividend income plus the self-employment plus the 10,000 of muniband plus the 1,000 of interest that they executed on deduction loans. We have to add it back plus 50% of their social security. Notice here, they are married filing jointly, they are above 44. Therefore, we're going to be working with this section here. Well, they would report taxable income equal to the lesser of 85% of the social security benefit, which is 7,650, that's one figure, or 85% of the access of provisional income over 44,000, which is the amount is 41,225 plus the lesser of 6,000, which is given in the formula, or 50% of social security benefit. 50% of social security benefit is 4,500. Okay, therefore their taxable income is 7,000, I'm sorry, their taxable benefit, their taxable income, their taxable benefit is 7,650, because this number is going to be lower than this number. Think about it, 41,225, 85% of that is way over 7650. Therefore, they received 9,007,650 taxable and the remaining is tax-free. So notice here, 85% of their social security benefit is taxable. So this is how we compute this social security tax benefit. Now, on the CPA exam, they usually don't expect you to memorize the formula, these formulas, but you have to know that you could have zero, you could have zero, none of it is taxable, or if you are in between, you could have up to 50% of your income is taxable. And if they gave you a large number, once the number is too large, just think of it 85% of their social security is taxable. So this is basically a shortcut, okay? At the end of this recording, I'm going to remind you to visit my website, farhatlectures.com, especially if you are studying for your CPA exam. Study hard, good luck, and most importantly, stay safe.