Life & Health Insurance Exam (National Portion)Taxes, Retirement, and Other Insurance ConceptsMedium
A client is 67 years old and receiving Social Security retirement benefits. They also have a part-time job that earns $20,000 annually. Which of the following statements is true regarding the taxation of their Social Security benefits?
- AUp to 50% of their Social Security benefits may be taxable.
- BAll of their Social Security benefits will be taxable.
- CTheir Social Security benefits will be completely tax-free.
- DUp to 85% of their Social Security benefits may be taxable.
Show answer & explanationAnswer & explanation
Correct answer: D. Up to 85% of their Social Security benefits may be taxable.
For individuals with higher combined incomes (Adjusted Gross Income + nontaxable interest + 50% of Social Security benefits), up to 85% of their Social Security benefits may be subject to federal income tax. Given a $20,000 part-time income, it's likely they exceed the lower thresholds.
Why the other options are wrong
- A. Up to 50% can be taxable for lower combined income thresholds, but 85% is possible for higher incomes.
- B. No more than 85% of Social Security benefits are ever taxable under current law.
- C. Social Security benefits are rarely completely tax-free if the recipient has other income.
Taxation of Social Security Benefits
A portion of Social Security benefits (up to 50% or 85%) may be subject to federal income tax depending on the recipient's 'combined income'.
- Combined Income = Adjusted Gross Income + tax-exempt interest + 50% of Social Security benefits.
- Thresholds determine 0%, up to 50%, or up to 85% taxation.
- Thresholds differ for single vs. married filing jointly.
Memory trick: Social Security taxes depend on your 'Combined Income' for the tax bracket.