Taxable Social Security Benefits

Some taxpayers have to pay federal income taxes on their Social Security benefits. This usually happens only if they have other substantial income (such as wages, self-employment, interest, dividends and other taxable income that must be reported on your tax return) in addition to Social Security benefits.

Taxable Benefits

To determine the amount of Social Security or Railroad Retirement benefits that may be taxable, taxpayers must compare the base amount with the total of: 1) One-half of the benefits received, plus

2) All other income, including tax-exempt interest.    

Other income is not reduced by any exclusions for:

•             Interest from qualified U.S. Savings Bonds,

•             Employer-provided adoption benefits,

•             Foreign earned income or foreign housing, or

•             Income earned by bona fide residents of American Samoa or Puerto Rico.

Planning Tip: If the only income received during the year was Social Security or Railroad Retirement benefits, the benefits are generally not taxable. Taxpayers should consider taking taxable IRA distributions and/or doing Roth conversions. Careful planning must be made to not take too large of a distribution so as to cause Social Security or Railroad Retirement benefits to be taxable.

How Much Is Taxable?

Generally, up to 50% of benefits will be taxable. However, up to 85% of benefits can be taxable if either of the following situations applies.

•             The total of one-half of the benefits and all other income is more than $34,000 ($44,000 for Married Filing Jointly).

•             The taxpayer is Married Filing Separately and lived with his or her spouse at any time during the year.

Who is taxed.

Benefits are included in the taxable income (if taxable) for the person who has the legal right to receive the benefits.

Withholding.

A taxpayer can choose to have federal income tax withheld from Social Security or Railroad Retirement benefits by completing Form W-4V, Voluntary Withholding Statement.

Investments That Help Reduce Taxable Social Security Benefits

Taxpayers may be able to reduce taxable Social Security benefits by reallocating investments that are generating income which is includable in the calculation used to determine taxable Social Security benefits to investments that do not generate includable income.

Tax Planning Strategies

U.S. Series EE and I bonds. Taxpayers who are earning taxable interest income from a bank CD that is causing a portion of Social Security benefits to be taxed, could switch the investment to U.S. savings bonds. Annual purchase limits apply.

Nonqualified annuities. Like interest accrued on U.S. savings bonds, earnings on a nonqualified annuity are deferred until the investment is cashed in. One advantage of choosing nonqualified annuities rather the U.S. savings bonds is there is no annual limit on the amount of principal that can be invested.

Real estate, gold, and other investments that produce capital gains. By switching investments from mutual funds and stocks that produce dividend income to investments that produce capital gains, the taxpayer may realize tax savings by reducing the amount of Social Security benefits subject to tax.