CPA Exam — REG (Regulation)Federal Taxation of IndividualsHard
A client, single and age 68, received $25,000 in Social Security benefits in the current tax year. Their other income included $30,000 from a private pension and $5,000 in interest income. What amount of Social Security benefits is taxable?
- A$15,000
- B$21,250
- C$12,500
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $21,250
To determine the taxable portion of Social Security benefits, the taxpayer's provisional income must first be calculated. Based on the provisional income, either 50% or 85% of the benefits will be taxable, subject to specific thresholds.
Why the other options are wrong
- A. This is 60% of the benefits, which is not a standard taxable percentage.
- C. This is 50% of the benefits, which is only taxable if provisional income falls into the lower threshold range.
- D. This would be incorrect as a portion of Social Security benefits is likely taxable given the other income.
Taxable Social Security Benefits
A portion of Social Security benefits may be subject to federal income tax depending on the taxpayer's 'provisional income' and filing status.
- Provisional income is calculated as Modified Adjusted Gross Income (MAGI) plus 50% of Social Security benefits.
- For single filers, thresholds are $25,000 (50% taxable) and $34,000 (85% taxable).
- For married filing jointly, thresholds are $32,000 (50% taxable) and $44,000 (85% taxable).
Memory trick: Social Security's Taxable Share: Provisional Income's the Key.