 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. 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. Simply put, 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 what it could be zero to 85%. Now, before we proceed any further, I have a public announcement about my company, Farhat Lectures.com. Farhat Accounting Lectures is a supplemental educational tool that's gonna help you with your CPA exam preparation as well as your accounting courses. My CPA material is aligned with your CPA review course, such as Becker, Roger, Wiley, Gleam, Miles. My accounting courses are aligned with your accounting courses broken down by chapter and topics. My resources consist of lectures, multiple choice questions, true-false questions, as well as exercises. Go ahead, start your free trial today, no obligation, no credit card required. First, how do we compute this provisional modified income? That's the first thing you want to know. Well, we're gonna take your adjusted gross income before social security. So we're gonna look at, take out social security, compute your adjusted gross income. Then add any interest on US 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, 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. 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, that after we compute this, then we have to follow this formula that's gonna 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 gonna go over the formula for merit filing jointly and it works the same way for single head of a household qualifying widow or widower. First of all, 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 your provisional could be between 32 and 44. 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 gonna look, what's the provisional income of our 42,000? We're gonna take 50% of it and compare that to 50% of your benefit and we're gonna 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 gonna 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 benefit. So you tag that to it. And if you are single, they have 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 an 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 gonna take their AGI plus 50% of their social security. Therefore, their provisional income is 19,000. Well, 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 gonna 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 or for 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 that 50% of the access of the income over 25,000. Remember, we only have 2,500 times 50% is 1,250. Therefore the access is the taxable benefit is 1,250. That's the taxable benefits of the 7,000 of the 7,000 that she received 1,250 the remaining is tax free. The remaining is tax free. Let's take a look at this third example. CNM file a joint return, showing interest and dividend of 46,000 self-employment income for Carlson 31,000 and non-taxable money bond of 10,000. They executed 1,000 of interest on education alone in the 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 mini bond 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 gonna 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 41,000 225 plus the lesser of 6,000 which is given in the formula for 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 and their taxable income. Their taxable benefit is 7,650 because this number is gonna be lower than this number. Think about it, 41,225, 85% of that is way over 7650. Therefore they received 9,000, 7,650 is 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, 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.