Most retirees are shocked to discover that in certain situations, Social Security benefits are counted as taxable income and can increase your tax bill. The IRS requires you to disclose Social Security income and provides worksheets that will tell you how much of it you have to include in your income. Below, we'll go through the process for reporting your Social Security benefits to the IRS.
A spot on the tax form for Social Security
Every January, the Social Security Administration sends out Form SSA-1099. The form shows the total amount of benefits you received from Social Security during the previous year.
That number from the IRS has its own spot on the tax form you file with the IRS. For those who file on a regular IRS Form 1040, line 20a is where you'll enter in the total amount of Social Security benefits that you received. Similarly, for those who file on IRS Form 1040A, the appropriate place to put your Social Security benefits is line 14a.
Figuring your taxable amount
The instructions for both Form 1040 and Form 1040A include a special worksheet that helps you figure out how much, if any, of your Social Security benefits are taxable. You can find a link to the IRS worksheet here.
In simple terms, the IRS has you take one-half of your Social Security benefits and then adds in your income from other sources, including work, investments, and business interests. If that number is greater than $25,000 for single filers or $32,000 for married filers filing jointly, then a portion of your benefits will typically be included as taxable income. For those who are married, file separately, and lived together at some point during the year, the threshold amount is $0.
There's an upper limit to how much of your benefits you have to include as income. For single filers, if the result of the calculation above is between $25,000 and $34,000, then a maximum of 50% of your annual Social Security benefits can be considered taxable. If the number is greater than $34,000, then that maximum taxability cap rises to 85% of your total Social Security benefits.
For married joint filers, the income thresholds are different. For those whose calculated income is between $32,000 and $44,000, the 50% maximum applies. Above $44,000, up to 85% of benefits can be included as taxable income. Those who are married and file separately are immediately subject to the 85% cap if they lived together at any point during the tax year.
Keep in mind, though, that these percentages are caps. In many cases, taxpayers will have a far smaller percentage of their benefits treated as taxable by the IRS.
Once you've done the calculations, you'll end up with a final figure for taxable Social Security benefits. For those who file on Form 1040, that figure goes on line 20b. The number goes on line 14b for filers of Form 1040A.
It might not seem fair that you have to report your Social Security benefits to the IRS and potentially have part of them taxed. In order to verify that you pay the correct amount of tax on your Social Security benefits, however, it's necessary to follow the procedures that the SSA and the IRS have put in place. Otherwise, failing to disclose your Social Security income could lead to an audit just as surely as leaving off any other type of taxable income would.