Stimulus checks and taxes on Social Security
Q: I pay income tax on a portion of my Social Security benefits. Will the stimulus checks cause even more of my benefits to be taxed?
A: The short answer is “no.” For the longer answer, here’s an explanation of how Uncle Sam taxes Social Security benefits.
The federal government can tax up to 85% of your Social Security benefits. To figure the tax on your benefits, you first need to determine your “provisional income.” This is equal to (1.) the total of 50% of your Social Security benefits, (2.) your tax-exempt interest and (3.) your adjusted gross income.
If you’re single, none of your Social Security benefits are taxed if your provisional income is less than $25,000. If your provisional income is between $25,000 and $34,000, then up to 50% of your Social Security benefits may be taxable. If your provisional income is more than $34,000, then up to 85% of your benefits may be taxed.
For married couples filing a joint return, your Social Security benefits are safe if your provisional income is less than $32,000. The 50% rate applies if your provisional income is between $32,000 and $44,000. If your provisional income exceeds $44,000, up to 85% of your benefits may be taxable.
Any additional taxable income will increase your adjusted gross income, which then increases your provisional income for Social Security tax purposes. If your provisional income goes up enough to move you from the 0% to the 50% bracket, or from the 50% to the 85% bracket, then you’re looking at a tax increase. So, the key question is whether your stimulus checks boost your taxable income.
Stimulus checks are really just advanced payments of a new Recovery Rebate tax credit for the 2020 tax year. As such, they aren’t included in taxable income.
So, your stimulus check won’t increase your AGI, or your provisional income. And if your provisional income doesn’t go up, the tax on your Social Security benefits won’t either.
Unless you live in a state with no income tax, you’ll have to file a state income tax return, too. The good news is that your stimulus payments won’t raise your state taxes, either. Most states don’t tax Social Security benefits. So, there’s no reason to worry if you live in one of those states.
You’re also safe if you live in one of the handful of states that do tax Social Security payments.
That’s because the calculation of your state tax liability is going to start with either your federal AGI or federal taxable income — and stimulus payments won’t increase your federal AGI. Because your stimulus payments aren’t being carried over as income on your state income tax return, you won’t end up paying state tax on that money.