Would your clients like to pay almost twice their federal tax rate? Probably not. Yet this is exactly what might happen to many baby boomers as they start collecting Social Security benefits. The unique manner in which the benefits are taxed means that recipients may pay tax at marginal rates of up to 1.85 times the federal income tax rate for their income level.
To understand how this happens, let’s start with the definition of income. The IRS requires a unique calculation called combined income, which is used specifically for Social Security taxation calculations. Combined income is the sum of adjusted gross income (form 1040, line 37, for you tax hounds), tax-free income, half of Social Security income and a few less common add-backs.
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