Taxation of Social Security Benefits
TAXATION OF SOCIAL SECURITY BENEFITS
By Jane A. Bruno, J.D., LL.M.
It would be nice to think that one of the benefits of getting older is that preparing your tax return would be easier. However, in many cases, just the reverse can be true. The rising cost of living has made it necessary for many seniors to work in order to supplement Social Security and other retirement benefits.
In many cases, healthy and active seniors have much to contribute to the work force and want to stay active in their field of expertise or try new challenges. Whatever the reason for working, additional income can make for headaches when tax season rolls around because that income can cause previously untaxed Social Security benefits to become taxable.
This article will provide the basics first of determining if the Social Security benefits are taxable and second of determining how much is taxable. If this is a problem you face, read on. It may seem a bit overwhelming, but don't get discouraged. Just take it one step at a time and after you're done you may decide to volunteer instead!
What are your Social Security benefits?
Each year, sometime in late January or February, you should get a statement from the Social Security Administration called a "Form SSA-1099". The amount reported in Box 5 of that form is the amount you will use to determine if any of the benefits are taxable.
If you get more than one form, you should add together the amounts in Box 5 of each form.
If you receive a "Form RRB-1099" this means your Social Security-equivalent is being paid by the Railroad Retirement Board. You will also use Box 5 of that form in calculating if benefits are taxable.
If you receive Supplemental Security Income (SSI) payments during the year, you should not include those payments in your calculations because they are not taxable for federal income tax purposes.
Are your Social Security benefits taxable?
If your only income for the year was Social Security or Railroad Retirement benefits, those benefits will generally not be taxed. However, since very few people can survive on that amount of income, chances are you have other sources that may result in your Social Security benefits being partially taxed.
These are the steps for determining taxability:
- (1) Add up your total income. This includes interest and dividend income, taxable pensions, other investment income, wages from part-time or full-time work plus tax-exempt interest income, excludable interest income from U.S. savings bonds, and excludable foreign-earned income. (You will note the excludable items are not normally taxable.) (You will also note you DO NOT include your Social Security benefits.)
- (2) Decide what your base amount is (this is an arbitrary amount, chosen, presumably, by Congress), depending on your filing status:
- $25,000 if single, head of household or qualifying widow(er).
- $25,000 if married, filing separately, and lived apart from your spouse for all of 2008.
- $32,000 if married, filing jointly.
- (3) Add your income [calculated in (1)] plus half of your Social Security benefits. If that total amount is more than your base amount, some of your benefits will be taxable. Joint filers Take note! If you are married and filing jointly, you must combine your incomes and benefits to determine if your combined benefits are taxable. This is true even if your spouse had no Social Security benefits. If he/she had income, it must be added to "total income" to see if you exceed your "base amount".
IMPORTANT NOTE: If you live overseas in a country that has a tax treaty with the US, your Social Security benefits may be taxed DIFFERENTLY!! You are encouraged to consult a tax professional and/or check out the treaty provisions. You can review the text of US bilateral income tax treaties at: www.irs.gov (just put “tax treaties” in the search box.)
FYI, US citizens who are residents of Canada, Egypt, Germany, Ireland, Israel, Italy (you must also be a citizen of Italy for the exemption to apply), Romania or the United Kingdom are exempt from US tax on their benefits.
If you are a nonresident alien and receive Social Security benefits from the US and live in Canada, Egypt, Germany, Ireland, Israel, Italy, Japan, Romania or the United Kingdom, you will not be taxed by the US on your benefits.
How Much of Your Benefits Are Taxable?
The amount of Social Security benefits that are taxable depend on the extent to which your income plus half of your benefits exceed certain base amounts. There are 2 possibilities:
- 50% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half of your benefits exceeds these base amounts:
- $25,000 if single, head of household or qualifying widow(er)
- $25,000 if married, filing separate and lived apart from spouse all of the tax year
- $32,000 if married, filing jointly
- NOTE: These base amounts are the same ones described earlier.
- 85% of benefits taxed. This is the amount of benefits that will be taxed if your income plus half your benefits exceeds these adjusted base amounts:
- $34,000 if single, head of household or qualifying widow(er)
- $34,000 if married, filing separate, and lived apart from spouse for entire year
- $44,000 if married, filing jointly
- $0.00 if married, filing separate and lived with spouse at any time
- (This means you will pay tax on 85% of your Social Security benefits if you have other income and use this filing status).
- NOTE: The adjusted base amount essentially allows the IRS to tax more of your Social Security benefits as income goes up.
How Do You Calculate and Report Taxable Benefits?
The IRS provides worksheets to help you calculate how much of your Social Security benefits to include as taxable income. The worksheet you use will depend on your tax situation. The most commonly used worksheet is for Form 1040 filers who do not have foreign earned income, foreign housing exclusion or deduction, or US savings bond interest exclusion and do not contribute to an IRA while at the same time having you or your spouse covered by a retirement plan at work. A copy of this worksheet can be found in the IRS packet of Forms and Instructions sent to most taxpayers.
The worksheet for those with foreign income or filing Form 4563, Exclusion of Income for Bona Fide Residents of Samoa, or Form 8815, Exclusion of Interest from Series EE or I US Savings Bonds Issued After 1989, or with income from Puerto Rico is found in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits.
The worksheets you must use if you contribute to a traditional IRA and you or your spouse are covered by a retirement plan at work or through self-employment are found in IRS Publication 590, Individual Retirement Arrangements (www.irs.gov). These worksheets are fairly complicated and have lots of instructions, but they also are used to calculate how much, if any, of your IRA contribution is deductible.
Jane Bruno is a tax consultant specializing in Americans overseas.