Are my Social Security Benefits Taxable? by Carolyn Flaherty

QUESTION: Are my Social Security Benefits Taxable?

Good question! However, as in most questions answered by way of the IRS Tax Code, the answer is not altogether straightforward. Therefore, I have attempted to break down the basics and keep the explanation as simple as possible. As always, if you have any difficulty decoding the process of determining taxable benefits; consult with a tax advisor. You may find you do not even need to file. We are here to assist you.

ANSWER: Maybe…

If you are receiving Social Security Benefits, you should be issued an SSA1099 that shows the amount of benefit you received during the year and any amounts withheld.
The taxable portion of benefits received depends upon your overall income and your marital status.

Children receiving benefits may also be taxed, but usually do not receive enough additional income to make the benefits taxable. If both you and your child receive benefits, calculate your tax liabilities separately.

Usually if Social Security benefits constitute all your income for the year, they are not taxable and you may not even need to file. However, if you have income from other sources, you must calculate total earnings to determine if your modified adjusted gross income, MAGI, is more than the base amount for your filing status as listed below, (for tax year 2010).

Base Amount:
Married filing jointly $32,000
Married filing separately* $0
Other $25,000

*Only applies to those married filing separately who lived together during the year.

However, note that if you have sales of investment assets (i.e. you receive a 1099B Brokerage statement), you are required to file regardless of your total income level AND if you have tax withheld, you should file in order to claim a refund even if you are under the base amount for filing.

Calculating Base Amount:

1. Add ½ of the Social Security benefits received to all your other income including tax exempt income.
2. Compare this total to the base amounts listed above.

If you are close to the base amount, let a tax advisor review the computations for you.

So, what’s MAGI other than your favorite old great granny?

MAGI is a somewhat complicated calculation, but again, I will attempt to provide some clarity.

To get to MAGI you must go over the river and through the woods; the river being first calculating adjusted gross income. Adjusted gross income is the last line at the bottom of page 1 of your Form 1040 or Form 1040A or line 4 on Form 1040EZ. Going through the woods requires adding back the following items to your adjusted gross income:

 Any deduction you claimed for a regular contribution to a traditional IRA.
 Any deduction you claim for student loan interest or qualified tuition and related expenses.
 Any income you excluded because of the foreign earned income exclusion.
 Any exclusion or deduction you claimed for foreign housing.
 Any interest income from series EE bonds that you were able to exclude because you paid qualified higher education expenses.
 Any employer-paid adoption expense you excluded.
 Any amount claimed as domestic production activities deduction.

You do not have to add back contributions made to an employer plan such as a 401k plan. If you are running up against the limit for modified AGI, one way to reduce that number is to make deductible contributions to an employer plan.

For more in depth (and technical) information you can go to Publication 915 at http://www.prrllc.net/taxpublications.php and for other frequently asked questions, http://www.irs.gov/faqs/index.html .