During the current year, Margaret and John received $24,000 in Social Security benefits. The amount of their adjusted gross income for the year before any Social Security income was $140,000 and they received $19,000 in tax-exempt income. Explain the treatment of their Social Security income for tax purposes and the likely percentage of the Social Security income that will be taxable to Margaret and John.

Answer is explained in the explanation section below.

Explanation:

Solution:

We need to look at different cases for taxes.

Case 1: If Margaret and John chooses to file a federal tax as an individual.

Then, their accumulative income is between the range = $25000 - $34000

Then, they have to pay up to 50% of their benefits.

If income is more than this range, then obviously, 85% will be taxable.

Case 2: If Margaret and John file a joint return.

Then, your combined income must be between the range = $32000 - $44000

Then, they 50% of their benefits will be taxable.

If more than this range, then percentage will be go to 85%.

Case 3: If Margaret and John despite being married, file separate tax return:

Then, they would have to pay taxes on their individual benefits.

Let's suppose they choose the case 2 in which they file a joint return. Then, of course their combined income is greater than the upper limit of the range defined which is $44000. So, their 85% of their benefits will be taxable.

Benefit = $24000

Taxable amount = 85% x $24000 = $20,400