A taxpayer’s social security benefits are taxable only if the sum of his modified adjusted gross income and one-half of those benefits is greater than a specified base amount (Code Sec. 86(b)(1)). If a taxpayer’s social security benefits are taxable, the amount of such benefits included in the taxpayer’s gross income is generally limited to 50 percent of the amount of social security benefits he received during the year (Code Sec. 86(a)(1)). However, in some cases, an additional amount of social security benefits must be included in gross income (Code Sec. 86(a)(2)).
There is no provision allowing the exclusion of social security disability payments from income (Barefield v. Comm’r, 2013 PTC 12 (11th Cir. 2013)). In Seaver v. Comm’r, T.C. Memo. 2009-270, the taxpayer argued that she should be allowed to exclude or deduct social security disability payments. The taxpayer had been receiving tax-free long-term disability payments but when she started receiving social security disability (SSD) payments, those payments reduced the amount of tax-free long-term disability payments she was eligible to receive. Thus, the taxpayer argued, because of the award of SSD benefits, she forwent tax-free long-term disability benefits. According to the taxpayer, if she received long-term disability benefits tax free, and she received SSD benefits in lieu of long-term disability benefits, then she should receive the SSD benefits tax free as well. The Tax Court rejected that argument saying the fact that Congress has chosen to allow the tax-free receipt of benefits such as those paid under the long-term disability plan and to tax SSD benefits under Code Sec. 86 was not a choice that the court was free to question.
Determining If Social Security Benefits Are Taxable: A taxpayer is subject to tax on a portion of his or her social security benefits only if the sum of the taxpayer’s modified adjusted gross income (MAGI) plus 50 percent of the social security benefits he or she received exceeds a base amount determined by his filing status (Code Sec. 86(b)(1)). Married taxpayers who file a joint return must combine their incomes and benefits to figure whether any of their combined benefits are taxable, even if only one of the spouses received social security benefits.
Taxpayers who meet this threshold must then make the calculations to determine what amount of their social security benefits they must included in income.
Additional Tax Tip:
Taxpayers can use Worksheet A in Publication 915 to determine whether their social security benefits are taxable.
Modified adjusted gross income: A taxpayer’s MAGI is his or her adjusted gross income (AGI) with the following modifications:
(1) do not include any amount of the social security benefits received;
(2) add back the amount of the Code Sec. 135 exclusion of savings bond proceeds used to pay higher education expenses;
(3) add back the amount of the Code Sec. 137 exclusion of employer-provided adoption assistance;
(4) add back the amount of the Code Sec. 199 domestic production activities deduction (note that the domestic production activities deduction was repealed for tax years beginning after December 31, 2017 by the Tax Cuts and Jobs Act of 2017);
(5) add back the amount of the Code Sec. 221 student loan interest deduction;
(6) add back the amount of the Code Sec. 222 qualified tuition and related expenses deduction (note that this deduction was repealed for tax years beginning after December 31, 2020 by the Taxpayer Certainty and Disaster Tax Relief Act of 2020 in Pub. L. 116-260);
(7) add back the amount of the Code Sec. 911 exclusion of foreign earned income and foreign housing;
(8) add back the amount of the Code Sec. 931 exclusion of income from sources within Guam, American Samoa, and the Northern Mariana Islands;
(9) add back the amount of the Code Sec. 933 exclusion of income from sources within Puerto Rico; and
(10) add the amount of any tax-exempt interest not included in AGI (Code Sec. 86(b)(2)).
Additional Tax Tip:
An individual who receives social security benefits, has taxable compensation, contributes to his or her traditional IRA, and is covered (or whose spouse is covered) by an employer retirement plan must complete a special set of worksheets in IRS Publication 590-A, Individual Retirement Arrangements, to figure his or her IRA deduction, nondeductible contribution, and the taxable portion, if any, of his or her social security benefits. These special worksheets are needed because of the interaction of the definition of modified adjusted gross income for purposes of computing the IRA deduction and the definition of modified adjusted gross income for purposes of computing the taxable amount of social security benefits (Announcement 88-38).
Base amount – A taxpayer’s base amount is:
(1) $32,000 if the taxpayer is married filing jointly;
(2) $0 if the taxpayer is married filing separately and lived with his or her spouse at any time during the tax year; or
(3) $25,000 in any other case (Code Sec. 86(c)(1)).
Example: Michael and Holly are married taxpayers filing a joint return. During the year, Michael had taxable pension benefits of $22,000, taxable interest income of $500, and net social security benefits of $7,500. Holly had net social security benefits of $3,500. They did not have any tax-exempt interest income. The sum of their modified adjusted gross income ($22,000 + $500 = $22,500) and 50 percent of the social security benefits received (($7,500 + $3,500) × 50% = $5,500) is $28,000, which is less than their base amount of $32,000. Therefore, their social security benefits are not taxable.
Determining Amount of Social Security Benefits Included in Gross Income: If a taxpayer’s social security benefits are taxable, the amount of such benefits the taxpayer must include in gross income is generally limited to 50 percent of the benefits received. However, in some cases, a taxpayer may have to include in income up to 85 percent of such benefits.
Additional Tax Tip:
Taxpayers generally can use either Worksheet 1 from IRS Publication 915 or the worksheet in the Form 1040 instructions to figure the amount of their taxable social security benefits.
Amount generally included in gross income: The amount of social security benefits included in a taxpayer’s gross income generally is equal to the lesser of:
(1) 50 percent of the social security benefits received, or
(2) 50 percent of the amount by which the sum of the taxpayer’s modified adjusted gross income (MAGI) and 50 percent of the social security benefits received exceeds the taxpayer’s base amount (Code Sec. 86(a)(1)).
Additional Tax Tip:
Thus, the amount of social security benefits includible in gross income is generally limited to 50 percent of the benefits received.
Example:
Georgia is single and files Form 1040 for 2013. In addition to receiving social security payments during 2013 year, she received a fully taxable pension of $18,600, wages from a part-time job of $9,400, and taxable interest income of $990, for a total of $28,990 for 2013. She received a Form SSA-1099 in January of 2014 following year that shows her net social security benefits of $5,980 in box 5. The sum of Georgia’s MAGI ($28,990) and 50 percent of her social security benefits ($2,990) exceeds her base amount ($25,000). Thus, Georgia must include a portion of her social security benefits in income for 2013. The amount of social security benefits Georgia must include in income for 2013 is $2,990, which is the lesser of (1) $2,990 (50% × $5,980) or (2) $3,490 (50% × ($28,990 + $2,990 − $25,000).
Additional amount included in gross income: If the sum of the taxpayer’s modified adjusted gross income plus 50 percent of his or her social security benefits exceeds an “adjusted base amount,” the amount of social security benefits included in his gross income is equal to the lesser of:
(1) 85 percent of the social security benefits received, or
(2) the sum of:
(a) 85 percent of the excess of MAGI plus 50 percent of the benefits over the adjusted base amount, plus
(b) the lesser of (i) 50 percent of the benefits, or 50 percent of the amount by which the sum of the taxpayer’s MAGI and 50 percent of the benefits exceeds the taxpayer’s base amount, whichever is less, or (ii) an amount equal to 50 percent of the difference between the taxpayer’s base amount and adjusted base amount (Code Sec. 86(a)(2)).
A taxpayer’s adjusted base amount is:
(1) $44,000 if the taxpayer is married filing jointly;
(2) $0 if the taxpayer is married filing separately and lived with his or her spouse at any time during the tax year; or
(3) $34,000 in any other case (Code Sec. 86(c)(2)).
Example:
Tom and Ginny Smith file a joint return on Form 1040 for 2013. Tom is retired and received a Form SSA-1099 in January 2014 that shows net social security benefits of $10,000 in box 5. Ginny is a retired government worker and received a fully taxable pension of $38,000. The Smiths had $2,300 in taxable interest income. They also had interest of $200 on a qualified U.S. savings bond, which qualified for the Code Sec. 135 exclusion. The sum of the Smiths’ MAGI ($40,500, including the savings bond interest) and 50 percent of their social security benefits ($5,000) exceeds their base amount ($32,000). Thus, the Smiths must include a portion of Tom’s social security benefits in income for 2013. More than 50 percent of Tom’s net benefits are taxable because the sum of the Smiths’ MAGI ($40,500) and 50 percent of Tom’s social security benefits ($5,000) is greater than the Smiths’ adjusted base amount ($44,000). The amount of social security benefits the Smiths’ must include in income for 2013 is $6,275, which is the lesser of (1) $8,500 (85% × $10,000) or (2) $6,275 [(85% × ($40,500 + $5,000 − $44,000)) + (50% × $10,000)].
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Cell: (760)567-3110
Fax: (760)836-0968
Email: DonFitchCPA@paylesstax.com
Website: http://www.paylesstax.com
(Updated 02/27/2021 06:05)