retirement

Social Security benefits are taxable?

Judy O'ConnorDear Tax Talk,
I am 66 years old. My income is approximately $30,000 a year. I just started collecting Social Security at 66. Do I have to pay taxes on this extra money and why? How do I prevent this from happening if possible?
-- Fred

Dear Fred,
According to the September 2013 statistics released by the Social Security Administration, you are now in the company of 39,313,000 individuals aged 65 or older receiving Social Security benefits. As a general rule, Social Security benefits are not taxable if they are your only source of income during a year. But if you have investment income or earned income, then up to 85 percent of your Social Security benefits may be taxable, depending on your filing status and the amount of the income.

The first step is to determine whether your benefits are taxable and if the answer is yes, then the next step is to calculate how much of your benefits are taxable.

To calculate whether your Social Security benefits are taxable, you need to add half of your Social Security income that is reported in Box 5 of your Form SSA-1099 to your income, which includes taxable pensions, wages, interest, dividends, other taxable income and tax-exempt interest income. If you are married and file a joint return, you need to include the income and benefits, if any, received by your spouse. You then need to compare this number to your "base amount."

Your base amount is:

  • $25,000 if your filing status is single, head of household or qualifying widow(er);
  • $25,000 if you are married filing separately and lived apart from your spouse for all of 2013;
  • $32,000 if you are married filing jointly, or
  • $0 if you are married filing separately and lived with your spouse at any time during 2013.

If the amount you calculated above is equal to or less than the base amount for your filing status, none of your Social Security benefits are taxable this year. If the amount calculated is more than your base amount, then some of your benefits may be taxable.

The next step is to use the worksheet that is included in IRS Publication 915, Social Security and Equivalent Railroad Retirement Benefits, to calculate the amount of the taxable Social Security benefits. You will report the Social Security benefits on Line 20 of your Form 1040.

In order to prevent the Social Security benefits from being taxable, you will have to decrease the amount of income you are receiving so that you are below your base amount.

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To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein. Taxpayers should seek professional advice based on their particular circumstances.

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