Few taxpayers realize during their careers that their Social Security retirement benefits could be subject to income tax. However, the IRS claims its share of Social Security income from 19 million Americans, and Social Security recipients have to report their benefits when they file their tax returns. Coming up with the total amount of income isn't hard, but the calculation of how much is taxable takes more work and is best done with the help of a Social Security calculator.
How do I know how much I received in Social Security?
Each year, the Social Security Administration sends Form SSA-1099 to anyone who received benefits from the program. The SSA-1099 is a simple information form that includes the benefits that the SSA paid to you during the year, as well as any benefits that you might have had to repay to the SSA.
How do I report that amount to the IRS?
The number from Form SSA-1099 then goes on your tax return for the year. Where you'll include it depends on whether you're filing on Form 1040 or 1040A. On Form 1040, you'll report this total amount on line 20a. The corresponding place to put the amount on the Form 1040A if you use that form instead is line 14a.
How do I figure out how much of my benefits to include as taxable income?
The calculations for figuring your taxable Social Security income are extremely complicated. However, there are a few situations that are easier to handle than others.
First, start by taking your Social Security benefits and then dividing that amount by two. Add in taxable income from other sources, including work income, investment income, taxable pension and retirement payments. If that total is less than $25,000 for single filers or $32,000 for joint filers, then you won't have to include any of your Social Security benefits as income.
However, if the total is above that threshold, then some other guidelines apply:
- For singles receiving between $25,000 and $34,000, up to half of your benefits could be included as taxable income.
- For singles above $34,000, up to 85% of your benefits are potentially includible as taxable income.
- The corresponding figures for joint filers are between $32,000 and $44,000, and over $44,000.
However, just because you fall into the area where up to 50% or up to 85% of your benefits could be included as income doesn't mean exactly that amount will be included. For instance, consider an example in which a single person gets monthly investment income of $500, a pension payment of $1,000 per month, $500 per month in IRA distributions, and $1,000 monthly from Social Security. Over the course of a year, that adds up to $12,000 from Social Security and $24,000 from other sources. Take half of $12,000 for Social Security, and you get $6,000. Add that to the $24,000, and you get $30,000. That falls into the up to 50% category above.
However, when you run the numbers through the calculator, you'll discover only $2,500 of the $12,000 you received in Social Security benefits is subject to tax. In this situation, therefore, you'd report $2,500 on line 20b of Form 1040 or line 14b of Form 1040A.
Why did you not have to report half of your benefits, or $6,000? The simple explanation is that the $5,000 by which your total calculated income exceeded the $25,000 threshold was less than the total Social Security benefits you received during the year. That kept the percentage of your benefits that were taxed to just 21%.
Reporting Social Security income to the IRS involves a bit of work. However, by understanding the rules and using helpful resources like calculators, you can make the job a little easier.