Social Security is generally considered a tax-free benefit, but that is not always the case. Depending on the amount of alternate income that you have in retirement and your filing status, you could owe taxes on up to 85% of your Social Security benefits.
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 IRS Free File to e-file your return (if you make no more than $64,000), 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…