Sometimes they are. Make sure you understand the IRS’s rules.

Do you receive social security benefits?  Maybe you have retired and receive payments after working hard all your life.  Maybe you are disabled and receive payments as a result of your injury. 

Either way, the big question you probably have is whether or not your payments are taxable.  How do you make that determination?

Amount of Benefits Received

At the end of the year, you should receive form SSA-1099.  This will provide the amount of benefits paid out and any taxes withheld, as well as Medicare premiums deducted from your benefits.  The Medicare premiums can be deducted as itemized deductions.  You will use the benefits paid out to determine the amount of taxes you will owe.

Base Amounts

The IRS has established a threshold to determine whether your benefits are taxable, based on your filing status. For 2014, these base amounts are:

$25,000 – for single, head of household, qualifying widow or widower with a dependent child, or married individuals filing separately who did not live with their spouse at any time during the year

$32,000 – for married couples filing jointly

$0 – for married persons filing separately who lived together at any time during the year

Taxable Amount Calculation

As you know, the tax code is complex and often difficult to understand. And it’s critical that you get it right. If Social Security payments are at least one element of your tax mix, we suggest you let us handle your tax preparation and filing.

However, if you choose to handle it yourself, here’s a glimpse of the complexity in this particular area. 

First, take the amount of the benefits you received and divide it by half.  Then add to this amount any other amounts you received for taxable income, like interest and dividends, business income, and taxable distributions from an IRA, pension, or annuity.

If the total of these amounts is less than the amount of income adjustments you had (like deductible expenses as a teacher, moving expenses, alimony you paid, and contributions to an IRA or Health Savings Account), you will not owe anything on your benefits. 

If your income items total more than your adjustments, compare this to the base amounts.  If the base amount is more than your income less adjustments, you won’t owe anything on your social security income.

If the amount is more than the base amount, subtract the following from the net you just calculated:

$12,000 if married filing jointly

$9,000 if single, head of household, qualifying widow(er), or married filing separately (and you lived apart from your spouse for all of 2014)

If you still have not gone below zero, you’ll have more calculations to make.

Obviously, calculating the taxes you owe on Social Security payments can be a grueling process. Let us know if we can help you sort it out.