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Frequently Asked Questions - Taxable Social Security

Q: I received a lump-sum Social Security benefit. It covered several prior years; how can I report that to the IRS?

A: Generally, you use your current-year income to figure the taxable part of the total benefits received in that year. However, you may be able to figure the taxable part of a lump-sum payment for an earlier year separately, using your income for the earlier year. You can elect this method if it lowers your taxable benefits.

Under the lump-sum election method, you refigure the taxable part of all your benefits for the earlier year (including the lump-sum payment) using that year's income. Then you subtract any taxable benefits for that year that you previously reported. The remainder is the taxable part of the lump-sum payment. Add it to the taxable part of your benefits for the current year (figured without the lump-sum payment for the earlier year).

See IRS Publication 915 for more information on this method.

Q: When you have reached the age of 70, are some Social Security benefits still taxable?

A: Age is not a factor in taxing Social Security. It depends on the level of taxable gross income, the total amount of Social Security received, and your filing status.

Q: My wife and I both retired in September. Our income prior to that was $46,000. SSA payments began in December. Why am I being charged 85 percent tax on those benefits? Am I missing some instruction on the tax form?

A: You are not being taxed at a rate equal to 85 percent.
You are paying tax at your normal tax rate on your Social Security benefits, because that's what the law requires. Social Security income becomes taxable when your other income, plus half of your Social Security, exceeds an amount based on your filing status ($32,000 if you filed jointly). Initially, only 50 percent of your benefit above a certain threshold is taxable. When you exceed the first threshold, up to a maximum of 85 percent of your benefit can be taxed.

Q: I started receiving Social Security this year. My only [other] income is from my company retirement, which is $20,465 per year. I pay federal taxes on this income. Will I have to pay any taxes on the income I receive from Social Security?

A: Some of your Social Security benefits may be taxable. It all depends on your other income and filing status. Social Security only becomes taxable when half of your benefits are added to other gross income and that total exceeds an amount determined by your filing status. For example, the amount for married filing joint is $32,000 and for single taxpayers, it is $25,000. Use the Social Security work sheet that is in your tax booklet to calculate the taxable portion, if any.

Q: What is the definition of "earnings" for purposes of the maximum amount I may earn before my Social Security benefits have to be paid back? I have not reached full retirement age.

A: For purposes of determining whether Social Security benefits must be paid back, a person's earnings for a taxable year are the sum of (1) pay for services as an employee plus (2) all net earnings from self-employment, minus (3) any net loss from self-employment, for that year.

Wages for Social Security purposes are "gross wages"; those are wages before any payroll deductions for income tax, Social Security tax, dues, insurance, or other deductions by the employer. Gross wages are also the basis for the Social Security credit and for determining whether benefits must be withheld because of earnings.

Non-work sources of income, such as the following, do not count as wages for the earnings test:

* Inheritance payments
* Pensions
* Income from investments
* IRA distributions
* Interest
* Other sources

The Social Security retirement program insures against loss of earnings from work and not against the failure to have investment income.

The rules for this calculation can become quite complicated, especially if you have nonqualified stock options. I advise you to speak with the Social Security Administration directly if you still have questions. You can call, toll-free, 1-800-772-1213.

Q: Why do they tell you to put a "D" by the word "benefits" when you are completing the Social Security worksheet, and what does it stand for?

A: There are different rules to tax Social Security benefits when the filing status is married filing separate. The "D" by "benefits" lets the IRS know that you lived apart from your spouse for all of the tax year. That fact can make a big difference in computing taxable Social Security benefits.

Q: What income is taxable when determining if Social Security is taxable? Specifically, I am referring to military retirement benefits, federal government employee retirement benefits, and IRA dispositions. Thank you.

A: Military retirement benefits, federal government employees' retirement benefits, and IRA dispositions—all are taxable. You will receive a Form 1099-R from each of the plan administrators. The 1099-R will tell you how much, if any, distribution is taxable. Those amounts get posted as either pension or as IRA income. As such, they are all included in the formula for determining whether any Social Security benefits get taxed.


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