If you receive Social Security or Social Security Disability Insurance (SSDI) income, you will also receive a Form SSA-1099 from the government. This form tells you the total amount of your benefits but does not tell you if any of your benefits are taxable, or at what percentage.
You can use IRS Free File to e-file your return (if you make no more than $62,000), and the software will figure the taxable component of your benefits for you. However, you can get a reasonable estimate by combining half of your Social Security benefits with all other income (including tax-exempt interest) and comparing it to the base amounts that are excluded from tax. Anything over the base amount may be taxable.
The base amounts are $32,000 for married filing jointly and $25,000 for all other filing statuses, with one exception. If your status is married filing separately and you lived with your spouse at any time during the tax year, all of your SSA/SSDI benefits are taxable.
Between Form SSA-1099 and Notice 703 (a worksheet that is included with your SSA-1099), you should have all the information you need. Notice 703 guides you through summing up three income sources:
- SSA/SSDI Benefit Components – Box 5 in Form SSA-1099 contains your net SSA/SSDI benefits for tax purposes. It is the total in Box 3 (all benefits paid minus deductions, along with explanations) minus the total in Box 4 (any payments or other money going from you back to the Social Security Administration)..
Sum up the totals in Box 5 for all the SSA-1099s that you receive, including your spouse’s if he or she also receives benefits and you are filing jointly. One-half of that total serves as your income for these calculations..
- Taxable Income – Other sources of income as listed on your Form 1040 covering taxable pensions, wages, dividends, and interest. This is the total of most of the income boxes in lines 7-21 of your Form 1040 with the exception of non-taxable portions of pensions and annuities and tax-exempt interest (lines 8b, 15a, and 16a).
- Tax-Exempt Interest and Exclusions – This covers the tax-exempt interest in Form 1040, line 8b (such as interest from U.S. Savings Bonds) and various exclusions, like foreign-earned income. Details may be found in IRS Publication 915, “Social Security and Equivalent Railroad Retirement Benefits.”
The total of these three constitutes Line E in Notice 703. From this total, subtract the “above-the-line” deductions from your 1040 form (lines 23-32 plus write-in adjustments). In essence, you are calculating an adjusted gross income (AGI) based on your SSA/SSDI benefits. None of your benefits are taxable if the result is smaller than the base value for your filing status.
If the result is higher, some of the amount over your base status will be taxable. You need to perform another calculation to determine whether the maximum of 85% of your benefits or a lesser amount will be taxed. Essentially, there is a second income threshold of $44,000 for married filing jointly, or $34,000 for other statuses, that determines the taxable percentage.
It sounds convoluted – and to a certain extent, it is – but Publication 915 has a series of useful worksheet examples to guide you through the process. If you find the process too confusing, consult with a qualified tax professional to help you determine your taxable benefits.
This process allows you to minimize or eliminate tax on your Social Security benefits, so be sure to take advantage. Do not let some calculations, worksheets, and tax jargon scare you away from potential tax savings.