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Taxable Social Security Benefits
Some taxpayers have to pay federal income taxes on their Social Security benefits. This usually happens only if they have other substantial income (such as wages,
self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to Social Security benefits.
Taxable Benefits
To determine the amount of Social Security or Railroad Retirement benefits that may be taxable, taxpayers must compare the base amount with the total of:
1) One-half of the benefits received, plus
2) All other income, including tax-exempt interest.
Other income is not reduced by any exclusions for:
• Interest from qualified U.S. Savings Bonds,
• Employer-provided adoption benefits,
• Foreign earned income or foreign housing, or
• Income earned by bona fide residents of American Samoa or Puerto Rico.
Taxable Social Security Base Amounts
Filing Status Base Amount
Single, HOH, or QW…………………………………………………………… $ 25,000
MFS and lived apart from spouse all year……………………………. $ 25,000
MFJ………………………………………………………………………………… $ 32,000
MFS……………………………………………………………………………………….. $ 0
Worksheet to Determine if Benefits May Be Taxable
A) Amount of Social Security or Railroad
Retirement Benefits……………………………………………….. A)_______
B) One-half of amount on line A………………………………….. B)_______
C) Taxable pensions, wages, interest, dividends,
and other taxable income………………………………………… C)_______
D) Tax-exempt interest plus any exclusions from
income…………………………………………………………………. D)_______
E) Add lines B, C, and D……………………………………………… E)_______
If the amount on line E is less than or equal to the base amount, none of the benefits are taxable. If the amount on line E is more than the base amount, some of the benefits may be taxable.
Example #1: John and Betty, a married couple both age 68, are retired and receive the following income:
Source John Betty
Social Security………………………………. $ 7,500…………… $ 3,500
Pension……………………………………….. $ 16,000…………… $ 6,000
Interest……………………………………………. $ 250………………$ 250
John and Betty file a joint tax return. Their income used to determine if Social Security benefits are taxable ($28,000) is less than the taxable Social Security base amount ($32,000) for joint filers. None of their Social Security benefits are taxable.
Worksheet to Determine if Benefits May Be Taxable
A) Amount of Social Security or Railroad Retirement
Benefits………………………………………………………………… A)__$11,000____
B) One-half of amount on line A………………………………….. B)____$5,500___
C) Taxable pensions, wages, interest, dividends, and
other taxable income………………………………………………. C)_$22,500______
D) Tax-exempt interest plus any exclusions
from income………………………………………………………….. D)_____0__
E) Addlines B, C, and D……………………………………………… E)__$28,000_____
Planning Tip: If the only income received during they ear was Social Security or Railroad Retirement benefits,the benefits are generally not taxable. Taxpayers should consider taking taxable IRA distributions and/or doing Roth conversions. Careful planning must be made to not take too large of a distribution so as to cause Social Security or Railroad Retirement benefits to be taxable.
Example #2: Assume the same facts as Example #1 however the combined interest income for John and Betty is $10,000 instead of $500. Their income used to determine if Social Securitybenefits are taxable ($37,500) is greater than the taxable Social Security base amount ($32,000) for joint filers.Therefore, some of their Social Security benefits are taxable.Worksheet to Determine if Benefits May Be Taxable
A) Amount of Social Security or Railroad Retirement
Benefits………………………………………………………………… A)_______
B) One-half of amount on line A………………………………….. B)_______
C) Taxable pensions, wages, interest, dividends, and
other taxable income………………………………………………. C)_______
D) Tax-exempt interest plus any exclusions
from income………………………………………………………….. D)_______
E) Add lines B, C, and D……………………………………………… E)_______
How Much Is Taxable?
Generally, up to 50% of benefits will be taxable. However,up to 85% of benefits can be taxable if either of the following situations applies.
• The total of one-half of the benefits and all other income is more than $34,000 ($44,000 for Married Filing Jointly).
• The taxpayer is Married Filing Separately and lived with his or her spouse at any time during the year.
Who is taxed. Benefits are included in the taxable income
(if taxable) for the person who has the legal right to receive the benefits.
Example: Lisa receives Social Security benefits as a surviving spouse who is caring for two dependent children, Christopher,age 9, and Michelle, age 7. As dependents of their deceased father, Christopher and Michelle also receive Social Security benefits. The benefits for Christopher and Michelle are made payable to Lisa. When calculating the taxable portion (if any)of the benefits received, Lisa uses only the amount paid for her benefit. The amounts paid for Christopher and Michelle must be added to each child’s other income to see whether any of those benefits are taxable to either of the children.
Withholding. A taxpayer can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Statement.
Investments That Help Reduce Taxable Social Security Benefits
Taxpayers may be able to reduce taxable Social Security benefits by reallocating investments that are generating income which is includable in the calculation used to determine taxable Social Security benefits to investments that do not generate includable income.
Tax Planning Strategies
U.S. Series EE and I bonds. Taxpayers who are earning taxable interest income from a bank CD that is causing a portion of Social Security benefits to be taxed, could switch the investment to U.S. savings bonds. Annual purchase limits apply.
Non qualified annuities. Like interest accrued on U.S.savings bonds, earnings on a non qualified annuity are deferred until the investment is cashed in. One advantage of choosing non qualified annuities rather the U.S. savings bonds is there is no annual limit on the amount of principal that can be invested.
Real estate, gold, and other investments that produce capital gains. By switching investments from mutual funds and stocks that produce dividend income to investments that produce capital gains, the taxpayer may realize tax savings by reducing the amount of Social Security benefits subject to tax.
Please contact the Sarasota CPAs at Sterling Tax & Accounting for more information!