Tax Complications – How SS Benefits interact with Other Income

A recent post about the taxation of Social Security (SS) benefits provided an example of the complexity of the way that SS benefits are taxed, and how they interact with other sources of income. I’ve read innumerable articles on this complexity, and experienced it first hand while preparing hundreds of tax returns for AARP TaxAide. Clients were frequently surprised and confused by this.

The referenced post’s example posits a couple, 65+, MFJ tax status, with $50,000 in combined SS benefits. The Dinkytown 1040 calculator shows that the couple could have $31,162 of other taxable income and still have $0 taxable income. This is partially due to the additional senior deduction of $12,000 implemented in 2025. In 2026, the senior couple has a total deduction of $47,500 ($35,500 standard and $12,000 senior deduction). The couple’s maximum taxable SS benefit is 85% of the $50,000, or $42,500. Since this is less than their total deduction, no amount of a Roth distribution included in the SS taxability formula would have any impact on the couple’s tax.

I then considered how a significantly larger combined SS benefit would behave. The maximum SS benefit in 2026 is $5,181 per month, or $62,172 per year. The combined couple’s maximum benefit would be $124,344.  The maximum taxable amount of their SS is 85% of this, or $105,692.  If the couple’s only income was their SS benefits, the taxable amount of their benefits would be $21,446, or 17%.  This is well below their deduction, so their tax would be $0.  They could have up to $14,083 in additional taxable income and still have the $47,500 deduction wipe out any tax.  That’s $138,247 in income with no tax. If the entire $138,247 were an IRA distribution, they would pay $10,415 in tax.

To reach the maximum 85% of their benefits being taxable, they would have to have $99,150 in other income.  At that amount of income ($223,494) they would have a tax bill of $25,847.

I also wondered how long-term capital gains (LTCG) would impact the couple’s tax.  LTCGs have preferred tax rates, including a 0% rate for taxpayers in the lower brackets. Consider a scenario with the original $50,000 of SS benefits and $100,000 of other forms of income – Traditional IRA distribution, Roth IRA distribution, and LTCG. Per the Dinkytown calculator, this is how the tax would be calculated for the 3 cases.

1) $100,000 Trad IRA Distribution – $42,500 Taxable SS, $95,000 taxable income, $10,907 tax.

2) $100,000 Roth IRA Distribution – $5,250 Taxable SS, $0 taxable income, $0 tax.

3) $100,000 LTCG – $42,500 Taxable SS, $95,000 taxable income, $0 tax.

Case 3 is interesting because it demonstrates that moving the $95,000 of taxable income into the LTCG category saves the taxpayer $10,907.  I used this concept when managing my mother-in-law’s finances.  Her dementia diagnosis caused most of her memory care expenses to be qualified medical expenses, thus giving her a significant amount of itemized deductions.  This allowed us to withdrawal funds from her Trad IRA tax free, and to later harvest some LTCG tax free.