What Do You Mean My Social Security Benefits are Taxable?
One of the most frequent tax surprises I have heard voiced over the years is when people first find out they may have to pay federal income tax on some of their Social Security benefits. Ironically, they may have received Social Security benefits for years and never had any of it taxed, so never considered the possibility.
They may have even wondered why each year they, like all Social Security recipients, receive a Form SSA-1099 from the Social Security Administration showing the total amount of their benefits. After all, a 1099 is a tax information reporting form, and Social Security isn't taxable, right?
Well, not so fast! In many cases it isn't, but increasingly these days more and more recipients find themselves paying tax on some portion of their benefits.
And how much of those benefits gets zapped can be a sliding, if somewhat confusing, scale. Anywhere from nothing all the way up to 85% of the benefits received may be taxable.
How much, if any, of your Social Security benefits are taxable depends on your total income and marital status. That said, generally, if Social Security benefits are your only income, your benefits are not taxable and you probably do not need to file a federal income tax return.
If, however, you received income from other sources, your benefits will be taxed once your modified adjusted gross income is more than the “base amount” for your filing status (explained further below).
Your taxable benefits and modified adjusted gross income can be figured using a worksheet in the Form 1040A or Form 1040 Instruction booklet. Of course, if you use a tax preparer, they can do this calculation for you as well.
Here's a quick computation to determine whether some of your benefits may be taxable:
- First, add one-half of the total Social Security benefits you received to all your other income, INCLUDING any tax-exempt interest and other exclusions from income.
- Then, compare this total to the base amount for your filing status. If the total is more than your base amount, some of your benefits may be taxable.
- The 2011 base amounts are:
- $32,000 for married couples filing jointly.
- $25,000 for single, head of household, qualifying widow/widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year.
- $0 for married persons filing separately who lived together during the year.
The surprise for many comes when they have gone for years not paying any tax on their benefits, but then have an unexpected source of income in one or more years. This could be something like a one-time sale of property, inheritance of an IRA or similar account from which distributions are taken, or as has become more common in our area of the country the receipt of a gas lease bonus or royalty.
These unexpected sources of income can push the taxpayer over the base amount and cause taxes to kick in on the benefits too. In effect, it's a double tax whammy because you not only pay the required tax on the regular income, but now also on the Social Security benefits.
Or perhaps you acquire in some way a portfolio of tax-exempt securities. No problem right, after all they are tax-exempt? Think again! Look back above at the base amount formula and see how even tax-exempt income can cause a problem.
Looks like an unconstitutional ploy to indirectly tax municipal bond tax-exempt interest to me, but, alas, the courts haven't seen it that way.
Anyway, fortunately many states (like Arkansas) consider Social Security benefits completely tax-exempt, thus not adding further insult to what many consider a tax injury.
For more information on the taxability of Social Security benefits, you can see IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, easily obtained online at www.irs.gov.
